Why profit dips when revenue increases

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Jonar Nader speaks with Gregg Toyama of Harcourts about getting it right, the first time. Jonar talks about why he does not advise managers to give awards for ‘best employee’.

There are two videos below. The second one is of a higher quality for those with high-speed internet connection. The first video is 12 Mb. The second is 22 Mb. Video length is 8 minutes. Further below is a transcript of the video.

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Here is the transcript:

Host: Jonar, you spoke about increasing productivity and profitability as well and the point you made about doing it one time but doing it right really resonated with me. Can you just expand on that and your thoughts of how that might pertain to our real estate industry as well as any industry.

Jonar Nader: Sure. Well, my company Logictivity, it does training and we conduct proper consultancy services in terms of research and analysis. And I conducted this huge investigation into the profitability of companies. And why is this company profitable and why did this company not make a profit? Because it amazed me that when you look at all the university studies of corporations who have boomed, and on the graph, they go sales increase, increase, increase. People go, ‘Wow, look at the sales increase.’ And then you say, show me the profitability, it goes the other way. Sales go up, profitability goes down. And I asked myself, ‘How is this?’ I would have thought everything should go up together. I would have thought that the economies of scale, if anything rather than this dip. So I went out in search of why profitability dips when revenue increases.

And I found out that it is a question of inefficiency. And so, the study I conducted showed this. If we ask why didn’t you make a profit and delve into it, it was because of the double handling. So a company would say to me, ‘We lost actually money last year.’ I said, ‘Why?’ They said, ‘Well, because this is what it took to make the business.’ I said, ‘How much of that activity was making business and how much of that activity was redoing, resending, re-faxing, apologizing, going to court, recalling the product?’ Have you seen the hundreds of thousands of products that are recalled every year? And I think if only you just waited like 24 hours before you launched the product. Like I was only reading the paper just yesterday, I think, and it said a particular toy is being recalled. Why? Because there is a small element in it, for the child could choke on it. I mean, is this new? Don’t we always know there’s an element of choking in toys and they’re still recalling them? Why launch them in the first place? And imagine the money that is hemorrhaging, the loss of profitability.

Now, if you count that in terms of what it costs to rectify, it is huge but it is backroom stuff. And it’s like going to the well collecting all this wealth and money and someone in the backroom has got the tap turned on. And that’s because no one understands the value of the dollar. The best question you can ask any business is, ‘What do you have to do to generate one dollar net profit after tax?’ So let’s suppose you sell a mug, a coffee mug. And I’ll walk to you, any staff member of yours, your receptionist or forklift driver or anybody and I say, ‘That’s a nice mug. It sells for $30. How many of these do we have to sell to make one dollar net profit after tax?’

First of all, people don’t know what I mean by net profit. Don’t know what I mean by after tax but meaning after you paid for all the expenses and everything. The answer to the question is first, no one knows. And it takes a while to actually sort it out. And when we do find out, they don’t believe it. I have done this study so many times in so many corporations from car sales, organizations to hotels. And I ask them this question. And every time I present the findings, the chair votes with the board. We must reconvene while this is tested. They never believe it. And I’ll give you an example why because it is so shockingly low because actually, the amount of money that you make selling a product to make $1 net profit after tax, the energy is so high, you start to question whether you should be in business or not.

So, when I see a colleague throwing a ream of paper, that’s worth $6. Leaving the lights on all weekend, that costs $100 in a huge space, you know, industrial light. Air-condition on is $100 an hour. And I make $40 when I sell a machine and if I get an order for five, someone is celebrating and buys me a beer. So, do you see the mismatch here? So, start with this question. What does it take to make $1 net profit after tax then go and say, ‘How many times have we touched this piece of paper? How many times has this client had to call us? How many times has this truck had to go and come back?’

And so now what we need to do is say, ‘How do we create a sense of efficiency?’ And now, the smart people in life, when you look at these smart entrepreneurs, you go, ‘Wow. How do you deal with so much?’ Because, you know, I’ve written so many books and I’ve conducted so many affairs and people say to me, ‘How do you do it?’ I’ll tell you how I do it. I make a decision once. I touch something once. Now, when I’m touching it, people are going, ‘When is he going to get on with it? Why is he so finicky? Why is he so particular? Why is he so fussy?’ Because I would rather be fussy for five minutes and annoy you than flap about later and then waste five days because I only have – we think we have 365 days in a year. We don’t. We only have a few hours because we have to go to the dentist and get our hair cut and we have to see our family and get the petrol. And when you count all that, how many hours are left to conduct business? Very few.

And so the experts in life make sure that when they touch something, it’s done well. And that’s where the team comes into play. That’s where the teamwork has to happen because if I just sort of do my job well but you don’t, we will go back to square one. You know, and often people think – and that’s why I don’t like actually giving awards to the best employee because no matter how good I am or how good you are, if those around them don’t support it, then we’ve all failed. So there’s no such thing as the best employee. It has got to be the best team. And the team doesn’t work by hugging each other. It sometimes works by strangling each other because someone has got to say, ‘This is not on.’ ‘Oh no, it’s not my fault. I’ll let the manager deal with that. I’ll let the security deal with that.’

And we abdicate. We let somebody else deal with that because we’re not trained to confront or to cajole or to – we’re not trained. And this just comes down to culture. So, you know, it’s a very big process but the punch line is, there’s a lot of money to be made. There’s a lot of fun to be had. The agony and the stress doesn’t come from hard work. It comes from the feeling that my efforts are wasted. That’s where stress comes from or that the person who has obstructed me is nearer to me than my manager who can help me. So stress comes when someone says no to me but the person who’s authorized to say yes is gone and – or far away or overseas or the phone switched off. Now, that’s stress. So we need accessibility. We need decision-making power.

And that’s why I’ve always had fun in business. I love everything I do. The people around me like suppliers and others really have to think hard about what they want. My business or not, because at the end of it, they say, ‘Oh, that was tough.’ And I go, well, it was tough because you didn’t do your job properly in the first place. That’s why it’s tough. Not because I’m tough. But if I ask for a red apple, I expect a red apple. Don’t then fudge and say, ‘Oh, well, sorry.’ So, we need to learn how to demand, how to command, how to insist rather than say, she’ll be right mate. That’s probably the worst thing of the Australian culture, that she’ll be right mate.

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