By Anton Herbst, managing director of A.C.T.

With last month’s installment of this column explaining what it takes to build an effective customer value proposition, we’re moving onto building a successful profit model and the steps towards thoroughly understanding the interplay between revenues, costs, profit margin and resource velocity.

Tackling and understanding each of these areas is relatively simple – figuring out how they impact different aspects of your business is far more difficult though.

To recap, revenue is quite simply your company’s income, i.e. the volume of stock you are selling multiplied by the price you’re selling that stock at.

Cost is the sum of all expenses your company incurs in order to sell its stock to customers.

Profit is the differential between these two – and profit margin is the percentage differential between revenues and costs.

Resource velocity – the most confusing term of the four – is how  fast we need to turn over inventory, fixed assets, debtors and other assets – and overall, how well we need to utilise resources – to support our expected volume and achieve our anticipated profits

Sounds simple? Well, it’s a little more complex considering the economic downturn or recession we find ourselves in.

The Rand’s strengthening has been a challenge, since it’s meant that the price we are able to command for our products has slipped. At the same time, the natural slowdown in the market means demand for our products is tailing off.

Consequently, costs are coming under enormous pressure.

The only way to make healthy profits in this economy is to either increase margins or increase our resource velocity.

Increasing margins is counterintuitive in market conditions such as these – the tendency is towards selling higher volumes and this often calls for margins to be cut.

So, with margins under pressure, companies need to increase the velocity of resources. In a nutshell, companies’ cash to cash cycle has to speed up.

Building a sound profit model therefore revolves directly around finding the sweet spot between the profit margin your business is achieving and its ability to speed up its cash to cash cycle.

It is important to focus on both of these areas, since a company charging 10% profit margin on its stock, with a resource velocity that sees it turning cash into stock and back into cash again six times a year, makes the same return as a company with half the profit margin (5%), but the ability to turn cash into stock and back into cash again 12 times a year.

Personally, with the market as tight as what it is, I believe the key lies in maintaining margins at a reasonable limit and exercising excellent financial discipline.

There’s quite frankly far less room to move today when it comes to margins, after all, you need to remain competitive. There is however a ton more a company can do when it comes to managing its cash flow (cash to cash cycle) more effectively.

It’s no easy task, but after all we’re in a downturn – hard work is called for. I can personally testify to the fact that it can be achieved.

It can be done, but it takes focus, discipline and bravery. Good Luck.

By Anton Herbst, managing director of A.C.T.

Four months ago we embarked on a journey toward understanding the power of sound business models and how they can get you through the downturn.

And looking back on what’s taken place with the business and economic climates in South Africa over the past eight or so weeks, it’s clear this discussion point couldn’t have been timed better.

With the way things look in the market I believe the timing is right for us to take our business models up a level and not just be concerned with our own businesses. After all, the business models of our suppliers, peers and customers are vital influencers and contributors to our own success levels.

For this to take place, the business models of all concerned must align. It’s a case of asking oneself ‘what I do that makes your business better’ and vice versa.

It’s not just about what value your suppliers and partners’ hold for you, but how they improve the value proposition to the customer by working through you.

It’s an interesting way to begin thinking, because no matter how integrated we make our own businesses, in the greater scheme of things they are nothing more than silos connected together via a supply chain.

And since we’re all aware of how businesses cannot function effectively if they operate with various silos within their own business model, it’s not difficult to imagine what the potential of the end-to-end channel would be, if each player became more integrated with the next.

Since businesses are generally reticent to share their inner workings with peers and partners (everyone, after all claims to have a trade secret or a unique value proposition), the traditional communications models need tweaking.

We’re realizing that the styles of communication employed in the past aren’t speedy enough to cope with the complexity of a supply chain with merged business models.

Social media is becoming the enabler to the communications that take place across the supply chain, since the volume of information players in the supply chain need to communicate and the speed at which that needs to take place calls for a medium that’s instantaneous and capable of encouraging collaboration by its very nature.

If we get this right, we’ll find we are able to offer far more value to our customers than ever before, and that we are able to do so at a fraction of the cost.

But getting there is going to take trust – taking the first step towards trusting all of the members of the supply chain and sharing information freely is a bold one.

Despite this obstacle, I believe a more collaborative supply chain environment can work – and furthermore that it must work if we are to survive the rest of this economic crisis and whatever the future holds.

We must however clearly define the rules of engagement and ensure everyone involved is in it for the long haul.

This kind of thinking entails breaking new ground – companies can either evolve and become a part of it, or fall behind and become extinct, just like the Dinosaurs.