Solving the Profit Riddle

In the 2009 feature film, Sherlock Holmes, the famous detective works frantically to put together enough clues to solve the mystery of what is about to happen, before it happens.  If he can solve the riddle in time, and then predict what could happen, he can then change what actually happens.

Wouldn’t it be great if we could pull this off in real life when it comes to what will happen with our firm’s profitability?  In other words, be able to predict it, and thus buy ourselves some time to improve the situation, if necessary?

Well, we can.

Last week, we described our design firm business model to be a highly creative and technical problem-solving process that, ideally, generates revenues exceeding the costs of that process.

While this creative process can be messy and chaotic at times, it’s actually pretty easy to quantify in terms of cost.  And the revenues generated are similarly easy to quantify.

We just have to dig in and understand them all in fine detail, and then ascertain whether our revenues are exceeding our costs, and by how much.

It’s rather easy to know whether we’ve accomplished this in the past.  We simply look at the firm’s financial statements for a particular period in the recent or distant past.  There it is, in black and white numbers, exactly what happened.

Trouble is, by the time that information is available, it’s too late to help us much.

By the time all the timesheets are posted, invoicing is created and then sent out, and all of the bookkeeping completed for the period, the results may be several weeks old, if not more.

But we need to know right now.  This month, and then again next month.

Knowing before it happens is the key to being in control.  Knowing after the fact is called accounting.

So, how can we know in advance?

We can predict what is going to happen through revenue and cost projection.  Or, forecasting, as I like to call it.

It’s NOT guessing.

And it’s not really the same as budgeting.  Budgeting is really just the advance process of creating a budget for a future time period.  It doesn’t predict whether we’ll actually meet that budget.

Forecasting, on the other hand, is what I would describe as careful and well-informed estimating, and it’s a continual process.  A sort of crystal ball when it’s done well.

It does require some discipline and regularity– it can’t be neglected if we are to get reliable predictions.

It’s an ongoing riddle, and the detective must be continually working on the case.  Let’s begin working on it, too.

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