All organisations need to continually assess how they allocate the resources used in the provision of goods and services. Ideally, organisations should invest their resources in those goods and services that provide the greatest return. Sounds simple right? If it is so simple then why do so many organisations get it wrong?
Time and time again we see organisations underperforming by repeatedly investing in products and services that are marginal or loss making. One of the key reasons for underperformance appears to be as a result of organisations not completely understanding where the ‘cash’ comes from amongst the goods and services they sell. There are several reasons why this occurs:
- Revenue focused – concentrated on increasing revenue without fully understanding the profit impact
- Inadequate reporting – insufficient detail to identify individual product, location or service profitability
- Incorrect cost allocation – products and services not comprehensively costed resulting in inflated margins
- Demand changes – products once profitable have become obsolete
- Maintaining the status quo – doing what they have always done
While some organisations are profitable, losses from unprofitable goods and services are often masked by the profitable ones. It is this lack of visibility and understanding at the detailed product / service level that limits the effectiveness of an organisation’s resource allocation.
Organisations have an opportunity to improve performance by comprehensively understanding where the ‘cash’ comes from and where it does not. This process needs to be a regular part of every organisation’s management and planning processes to ensure resources are constantly being allocated as effectively as possible. Do you know where the ‘cash’ comes from?