Profits matter, don't they?

We all understand the formulae Revenue minus Costs = Profit. That basic formula, to someone like me, is like saying that Make-up = Beauty or IT = Data management. Profit represents so much more. Let’s peel the onion together and explore a little what I mean.

The other day I was doing some business systems advisory work for a client’s farm, gloriously situated on the shores of Lake Naivasha in Kenya, East Africa. As I drove through the gates and upto the house on arrival, a browsing giraffe winked at me and I pinched myself….no, it wasn’t Narnia. The family discussions held over the next few hours were about making profit. Enough profit suited some, more of it was sought by others and perhaps surprisingly for one or two none of it mattered. What was more important to the latter was conservation of past ways, in stark juxtaposition to the family’s growing expectations.

What I was intrigued by most was the lack of understanding by so many around the table of why profit mattered, how it should be measured and where it could and should be broken down into more digestible elements.

Like all good farms this one has a dairy herd, milked daily by hand and the production sold in the nearby town. Everyone reckoned that the dairy lost money, some felt this loss wasn’t important as the cows were a part of the establishment. I enjoyed trying to work out with them whether the lack of profit was real, how this could be quantified and whether, with better information, better management decisions could be made.

Another question that crops up in my mind when passing through East Africa is to what extent the local kiosks on the side of the road make enough profit to sustain themselves. The other day I stopped in Karatina, a small town in the Central part of Kenya and decided to ask a few shopkeepers some questions. Of course one has to be careful as people are suspicious of strangers asking personal questions but perhaps coming from an ageing, middle-aged, sunburnt man it didn't seem too much trouble.

One of my friends who is from India told me that I am a fool, of course shopkeepers understand profit otherwise they would soon be out of business. While I see his general point, I wondered that, if the nuance of profit struggles to seep through in the educated world of Naivasha landowners, how does it make itself felt in the world inhabited by undeniably less-educated roadside shopkeepers. What I found interested me hugely. The shopkeepers that I chatted to seem to have between 60 - 300 different items for sale. None of them had written trading records of their sales or purchases. They have no record of what, when and for how much things were traded and even getting to chat to them was surprisingly hard as they were constantly busy, servicing the needs of their customers. Initially I thought that perhaps I had stumbled across a source of genius - people who were so adept at mental mathematics that they could calculate in their heads multiple sums and remember the answers throughout the day. After all, when they finally put their feet up at the close of business, they need to know if all that effort was worthwhile. Didn’t they? In fact what I found was that humans cope with complexity by simplification. My 12 year old son is doing simplification of fractions at school and he asks me to help from time to time. It is fun to see someone learning what for years I have taken for granted. It turns out that Karatina shopkeepers do similar simplifications. One has worked out that in general she makes 10% profit margin and so for every $10 of cash in the till, she puts $9 aside to replenish her stocks and keeps $1 for the family’s daily needs. Hmmm, interesting but is she right? Probably over time she is roughly OK, otherwise she would not still be in business after 20 years. But, if she was super right then surely she would be running more than just one shop after 20 years.

My take is that we all benefit from simplification, but often there are times when detailed analysis throws out something more interesting for us to take action over. So you see, profit is in fact pretty interesting and definitely there is more to it than appears on the surface. Same with make-up, apparently.