The power of positive profit

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The

POWER of
POSITIVE PROFIT
How You Can Improve
ANY Bottom Line
in Sales, Marketing, and Management
with MoneyMath©

Graham Foster

John Wiley & Sons, Inc.


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Praise for The Power of Positive Profit
“This book is a major contribution to business understanding and conduct; the MoneyMath charts alone are worth the cover price!”
—Walter J. Reinhart, PhD, Professor of
Finance and Academic Director, Master
of Science in Finance, Loyola College

“Brilliant and dynamic—nobody else knows business numbers like this!”
—Naomi Rhode, Co-Founder and
Director, Smarthealth Inc.; President,
International Federation of Speaking

Professionals, Phoenix, Arizona

“We need more of your books for all our dealers!”
—Les de Celis, CEO, Tyres4U, Sydney,
Australia

“The book is awesome. You must join our board of directors!”
—Jim Marsh, CEO, Burns & Ferrall
Hospitality Equipment, Auckland,
New Zealand


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The

POWER of
POSITIVE PROFIT


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The

POWER of
POSITIVE PROFIT
How You Can Improve
ANY Bottom Line
in Sales, Marketing, and Management
with MoneyMath©

Graham Foster

John Wiley & Sons, Inc.


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Copyright © 2007 by Graham Foster. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
All MoneyMath Charts Copyright © 2004–2007 by Graham Foster, Pacific Seminars International Inc.
All rights reserved.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise,
except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without
either the prior written permission of the Publisher, or authorization through payment of the
appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers,
MA 01923, (970) 750-8400, fax (970) 646-8600, or on the web at www.copyright.com.
Requests to the Publisher for permission should be addressed to the Permissions Department,
John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011,
fax (201) 748-6008, or online at />Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best
efforts in preparing this book, they make no representations or warranties with respect to the
accuracy or completeness of the contents of this book and specifically disclaim any implied

warranties of merchantability or fitness for a particular purpose. No warranty may be created or
extended by sales representatives or written sales materials. The advice and strategies contained
herein may not be suitable for your situation. You should consult with a professional where
appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other
commercial damages, including but not limited to special, incidental, consequential, or other
damages.
For general information on our other products and services or for technical support, please
contact our Customer Care Department within the United States at (800) 762-2974,
outside the United States at (317) 572-3993 or fax (317) 572-4002.
Designations used by companies to distinguish their products are often claimed by trademarks.
In all instances where the author or publisher is aware of a claim, the product names appear in
Initial Capital letters. Readers, however, should contact the appropriate companies for more
complete information regarding trademarks and registration.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in
print may not be available in electronic books. For more information about Wiley products,
visit our web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Foster, Graham.
The power of positive profit : how you can improve any bottom line in sales, marketing,
and management / Graham Foster.
p. cm.
Includes bibliographical references.
ISBN-13: 978-0-470-05234-1 (cloth)
ISBN-10: 0-470-05234-1 (cloth)
1. Corporate profits. 2. Pricing 3. Sales management. 4. Cost control. I. Title.
HD4028.P7F67 2007
658.15'5—dc22
2006011037
Printed in the United States of America.
10

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This book is dedicated
with my deepest gratitude
to my dear wife Suzi
for encouraging me to write this and stick at it. She has
endured the tension of creative effort pouring from my soul.


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Contents

Foreword by Kerry Cattell
Preface by Walter J. Reinhart
Introduction

xi
xiii
xix

CHAPTER ONE
Overcoming a Shaky Start: Millennium Novum

1

CHAPTER TWO
Every Business Needs It: Margin

19

CHAPTER THREE
Issues Affecting Healthy Margins in Sales

31

CHAPTER FOUR

The Weapon of Math Instruction

45

CHAPTER FIVE
Balancing Your Company’s Selling and Management Efforts

53

CHAPTER SIX
Now for Some Real Bulletproofing

65

CHAPTER SEVEN
Why Your Perceived Value Beats Product Quality

79

CHAPTER EIGHT
How Salespeople Can Sell Higher

91

CHAPTER NINE
Getting Higher Market Prices

105

ix

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CONTENTS

CHAPTER TEN
Price Wars and Profit

117

CHAPTER ELEVEN
Price War Recuperation

135

CHAPTER TWELVE
Pricing for Profit in the Market

147

CHAPTER THIRTEEN
For Hard Times Have a Plan B

159

CHAPTER FOURTEEN
Cash Flow: Indicator of Financial Health

169

CHAPTER FIFTEEN
The Social Damage of Profit Failure

181

CHAPTER SIXTEEN
The Delight of Positive Profit

191

CHAPTER SEVENTEEN
Responsibilities Attached to Profit Making

209

APPENDIX A
MoneyMath Figures and Tables

221

APPENDIX B
Financial Management Questionnaire

263

APPENDIX C
101 Price Management Questions

266

Acknowledgments

271

Bibliography and Recommended Reading

277

Index

279

About the Author

284


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Foreword

he term business is used to describe a raft of activities that culminate
in the creation or distribution of wealth.
In the twenty-first century we have come to realize that the most
important thing in a business is its people. Without trained staff the business will not operate. While this appears to be a modern revelation, I am
sure good staff selection and the management of them was the backbone
of businesses in past centuries. However, there is no doubt that people

management is the most complex and difficult of tasks we have to manage in a business.
This book has nothing to do with people management. It addresses
the mechanics of operating a successful business—the numbers. In my
business life, I have been amazed at the number of senior people, marketing managers, sales managers, and so on, who do not understand the
profit and loss statement, how costs are made up, margins, and cash flow.
These are fundamental items of corporate knowledge needed to manage
a business.
This book aims to demonstrate to the reader how to manage these
tasks. It demonstrates the effect of price increases, cost reductions, and,
very importantly, the effect of discounting. It compares the value of a 1
percent sales increase versus a 1 percent cost reduction or a 1 percent
price increase.
The author, Graham Foster, is an experienced CEO and has been
involved in the turnaround of several businesses. He would be the first to
say that you must have good products and employ the right people, and
that excellent customer service is essential—yet none of this will work if

T

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FOREWORD

the margins do not cover the costs. Graham also discusses the morality of
the executives of a business. In fact, the good character of the CEO of a

business is one of my personal criteria for investing in a company.
I am sure that when you read this book you will gain knowledge
and find it extremely valuable. At a minimum, you will reinforce the basic business principles we all use to operate our businesses. Having
watched the author present at conferences around the world, and having
participated in his business workshops for over a decade, I can thoroughly endorse this work.
Happy reading.
Kerry Cattell
CEO and Company Director (retired)
Foseco Limited ASEAN
(China, Australia, Indonesia, Thailand,
Malaysia, Phillippines, Singapore, Taiwan)


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Preface

he current state of business leaves a lot to be desired: Its problems
range from ethical considerations to massive failures. Mark Twain
once observed, “It could probably be shown by facts and figures that
there is no distinctly American criminal class except Congress.” If Mr.
Twain were alive today he would most likely pluralize his observation by
including top management and the boards of directors of large corporations. Is it not rather fascinating that CEOs and other top managers receive huge salaries and bonuses for overseeing poor performance, up to
and including bankruptcy? And if by chance they are asked to resign, albeit with a nice cover story, they receive a sizeable payout—normally
more than the average worker earns in a lifetime.
The bonanza of payouts for departing CEOs is starting to migrate
from the business world to universities. In the midst of a storm regarding
excessive personal spending, the president of American University, Benjamin Ladner, grabbed a golden parasol of $3.7 million (not large enough
to qualify as an umbrella by industry standards) and departed. This should
create an awkward moment and make us wonder exactly what we are

teaching in universities. (As an aside, the golden parasol is quite large
when compared to an English or history professor’s salary of $50,000.)
The laying off of some 20,000 or 30,000 people, or even a couple
hundred, some of whom have spent a lifetime working for a firm, should
also give us cause for pause and reflection. If the layoffs are localized
(e.g., a plant closing in a small town) and no other industry exists, property values go into the tank and the community essentially dies as the
laid-off workers go into the social service system, which is paid for by our

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PREFACE

tax dollars. If the workers are retired and have a defined benefit program,
it is only a matter of time before the firm sheds the pension program by
shifting it into the government-insured program. Guess who pays the
pension? Right—all of us taxpayers.
These types of scenarios and social costs are often due to competitive advantage strategies relating to market share and discounting. These
concerns are a primary reason why current managers and students, who
are the next leaders of the corporate world, need to read Graham Foster’s
The Power of Positive Profit.
It is certainly not appropriate to lay the dismal state of business
only at the altar of fairness and justice. No, it is only rational and balanced to recognize that the fearless leaders of business are most likely following the “buyer value” mantra proposed by academics in such fine
educational institutions as Harvard University and Loyola College. All

too often marketing and management professors teach that the primary
way to increase market share* is to discount the price of the product or
service being offered. By doing this you increase buyer value, but what
happens to the value of the firm? As Graham so accurately points out in
this book, discounting is a way of life, in both our personal lives and in
business. However, by discounting, the firms allow margins to evaporate
and hence there is little or no return for the suppliers of risk capital—the
shareholders who are the owners of the corporation.
Graham Foster has come from industry and has been involved with
his share of successes and failures, and he knows how things work in the
pragmatic world. Throughout this experience the most important concept learned is the recognition of the power of positive profit. As you
read the book you will see how, from personal experience, he identifies
the hurdles and objections salespeople present that prevent the generation of positive profit because of a “discounting mentality.” Graham also

*The drive for market share is what market theorists call competitive advantage or competitive strategy.


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xv

shows that the goal of a firm should not be to maximize the value of the
buyer to the detriment of the firm, and that all too often the discounting
mania to achieve the competitive advantage does just that. Some good
examples of the discounting mentality to achieve market share include
both General Motors and Ford.
Instead of focusing on buyer value, let us define value as the maximum possible sales price minus total cost. The question then becomes
how the value of the product or service is divided between the seller

and purchaser, or what price to charge the buyer. In the competitive
strategy model, with competition being the driving force of all management decisions, the value generally accrues to the buyer. The emphasis on competition and gaining market share by providing value for
the buyer typically means a low sales price. The Power of Positive Profit
shows the implications of lower sales price and presents strategies to
keep more value (profit) with the firm, which in turn allows for new
product development, technology advances, and the wealth maximization of the owners. Graham presents and explains with tables and
graphs how a change of focus from buyer value to owner value can be
accomplished.
The purpose of this book is to examine the elements of finance,
marketing, production, and support functions, and to present the three
Ps for a successful enterprise: power, positive, and profit! While the three
Ps are similar to the 4-P theme used in basic marketing (i.e., price, product, place, promotion), they more fully represent finance and production, with marketing playing a dominant role in strategic planning. This
book shows how the power of positive profit is contrary to the emphasis
on competition and market share normally focused on by many firms
who follow the competitive strategy model.* The basic concepts behind
the power of positive profit were first presented by Graham Foster in the

*Following the drive for competitive market share can lead to another set of three Ps—
namely, pathetically-poor performance.


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PREFACE

first edition of The Power of Positive Profit (Everest Books, 2004) and are
based on his experience as a CEO along with thousand of presentations
he has made worldwide to diverse audiences. Over time he came to more

fully realize the negative consequences of competition and market share
being at the core of business decisions.
Many academics, media personnel, and businesspeople will contend that three forces dominate the world today regarding economics
and business:
1. Technology.
2. Globalization (which occurs due to technology).
3. The marketplace (which has the power to enable the first two
forces).
Having technology with a global outlook does not permit success
without knowledge of the marketplace. Knowledge of the marketplace
requires education and understanding of how things work, and most importantly the recognition of the power of positive profits. A firm using
high technology with a global perspective that does not recognize the
importance of margin and its relationship to profits is in for rough times.
Graham Foster addresses these issues and assists us to become part
of the solution instead of being part of the problem. In this book he lays
out mathematical truths that businesspeople can apply in strategic plans
in order to be competitive and maximize the wealth of the owners. In
fact, Graham shows with basic math that a price increase is often more
beneficial for a firm than a price discount.
I had the distinct pleasure of meeting Graham Foster on a flight
from the United States to Australia in 2005. I was on my way to take a
position as a visiting professor at Bond University on the Gold Coast,
Queensland, while Graham was off to one of his many worldwide presentations. In our conversation we discovered a common interest—namely,
the recognition that firms exist to maximize the wealth of the owners, or,


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xvii

put another way, to generate a stream of positive profits that allow a firm
to compete and grow in an ever-changing and competitive environment
while providing a return to the shareholders.
Even when a firm is facing an uncertain future, several truths
hold—basic business fundamentals along with basic math do not change
with time. As in the stock market, when you hear “It is different this
time” it is time to sell and wait on the sidelines until the madness is over.
The most recent example of this phenomenon was during the late 1990s
dot-com bubble. We are starting to hear the same thing with the inverted yield curve, which has been an accurate forecaster of economic
times, and with the real estate market. The only advice one can offer is
“Buyer, beware—and get out sooner than later.” It is not worthwhile trying to time the top.
The Power of Positive Profit could easily be adapted in any business
strategy course (from marketing and management to finance) at the undergraduate level and should be a must for MBA strategy courses. Undergraduates who learn the principles herein will be able to make a positive
impact on the firms that hire them and advance up the ladder. The MBA
candidate should know the principles and implement them to enhance
his or her career and the profits of the firm.
Don’t be put off by the fact that the concepts presented here are
founded on math. The objective of all firms is to maximize the wealth of
the owners, which is done by a long-term stream of positive profits.
Moreover, the math is basic math—one does not have to be a statistical
wizard to understand the concepts presented in MoneyMath:
• The power of positive profit puts the math of strategic decisions
into the forefront.
• The power of positive profit recognizes the objective of the firm
and allows for all stakeholders to be treated fairly.
• The power of positive profit avoids the myopic obsession of market share to maximize top management benefits.

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PREFACE

Foster’s The Power of Positive Profit takes you through various steps
using MoneyMath diagrams and charts (based on common sense) to help
businesspeople, whether salespeople or CEOs, to understand how their
actions can influence profits, and what actions should be avoided. As
Graham states, math is math, and once you understand the relationships
between sales price, margin, and profit, you are well on your way to being
successful. If you want to be part of the solution and not part of the problem, The Power of Positive Profit is required reading.
Baltimore, Maryland
April 2006

Walter J. Reinhart, PhD
Professor of Finance, Academic Director
Master of Science in Finance Program
Loyola College


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Introduction

n writing The Power of Positive Profit I have set out to address a few issues affecting the bottom-line success of businesses big and small after
9/11 and in this new Millennium. I also present some opportunity concepts for people at all levels in business, commerce, and industry to improve the bottom line where they work.
Since 1972 I have conducted business seminars and delivered
keynotes on every continent. As I have moved around the globe, I’ve

discovered that math skills, media culture, ethics, and morality affect the
bottom-line outcome of companies in positive or negative ways.
On the other side of the coin, I have noticed that companies with
strong understanding of math inside their ongoing operations seem to be
able to handle the ups and downs of the market relatively easily. Of
course when ethics and morality issues conflict with the profit motive, it
seems that it’s usually senior executives and directors who are most
tempted to choose unwisely. Failure by leaders almost certainly kills the
motivation of the employees, resulting in lower levels of customer service and then lower profits.
Some of what you’ll read in the pages that follow came from the vast
resources of public information on the Internet in the form of public financial statements, plus of course my own MoneyMath profit charts. The
complete profit charts themselves are included in Appendix A along with
an explanation of each. I call this the mother of all appendixes!
The stimulus to write this book came from the fact that many of my
business friends said they had never seen a collection of tables and figures
like the MoneyMath charts; they had seen some of them but not all together

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INTRODUCTION

in one place with explanations. The math used in the charts is timeless—it
never gets outdated.

Wise and foolish business decisions will continue till the end of
time, but if we accept the premise that we all work to feed ourselves and
our families, then making a profit is a worthwhile exercise. When we
make more than we need for food, clothing, and shelter, we then have
another choice—greed or philanthropy.
Success is not making the money for its own sake. It’s what is done
with it that matters most, because we certainly won’t be taking it with us
when we leave here.
I’m deeply grateful for the input, help, inspiration, and encouragement of the family, friends, colleagues, business leaders, CEOs, and others
who have been there for me along the way. The names of many of them
appear in the Acknowledgments section, with my deep thanks to them,
along with my apologies to those people I may have inadvertently omitted.
My special thanks to both Bob Kelly of Wordcrafters Inc. (Sun
Lakes, Arizona), who edited my first edition manuscript, and to Professor
Walter Reinhart, PhD, of Loyola College, who edited the second. And
unusual thanks to our family cat, Misty, who came into my office in the
wee small hours and curled up beside me, offering comfort. He has since
won a photographic contract for good-looking cats and will go on to star
in the cat world!
Deep thanks is also due to my late parents, particularly my mother,
who made me study hard at math and who gave me two important books
to read when I was young: Think and Grow Rich, by Napoleon Hill, and
the Holy Bible. My ultimate thanks go to the one, true, living God, who
has revealed Himself as the God of numbers: “In the beginning, God created the heavens and the earth”—day number one!
Phoenix, Arizona
September 11, 2006

Graham Foster

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CHAPTER ONE

Overcoming a Shaky Start:
Millennium Novum
After 9/11 . . . that presumption of continuing sales volume with
discretionary income is diminished.
—Graham Foster

hock and awe! Today’s newspaper says that your employer, the starship Enterprise, is on the skids. The company you dreamed of working
for is drastically out of control. Jobs are going to be lost, the company is
bleeding, the top managers have been fired—oh my gosh! Why me?
Where did they go wrong?
America and much of the developed world have ridden booming
economies since the early 1950s. The demographic bubble called the
baby boomers drove much of this growth. Another driving factor has
been the information economy, coming in over top of the industrial
economy that prevailed until World War II.
On September 11, 2001, I was in my room at the Hilton Airport
Hotel in Melbourne, Australia, having made a presentation that day to
some hungry business executives wanting to improve their bottom line. I
turned to the news channel and then it happened. Terrorists hijacked
four planes, and the rest is history—and remains history in the making

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The POWER of POSITIVE PROFIT

for the foreseeable future. We can all remember where we were and
what we were doing at that time. It was like the death of John F.
Kennedy or the attack on Pearl Harbor, the kind of event that freezes
time in our memory.
The economic damage done to the developed world in general and
the American economy in particular is with us today. My guess is $1 trillion in total damage was wreaked that day. Just prior to that in the 1990s,
the West had engaged in business excesses that in hindsight we would all
agree had been allowed to get out of control. That trillion-dollar loss was
and is an unplanned overhead for the world economy, forcing us all to reconsider how we sell and manage for profit. The fallout of 9/11 has added
a worldwide cost that has simultaneously reduced both sales and profits.
The loss has been compounded more recently by the Indian Ocean
tsunami and Hurricanes Katrina, Rita, and Wilma, with growing insurance burdens and the continuing hike in fuel costs.

In this new millennium, we have also seen some of the biggest corporate busts in history. Some of these busts have been due to corporate
greed, malpractice, and a lack of business ethics and morality. However,
the majority of business failures were and still are due to poor management and bad board direction. It is rarely the workers who wreck a corporation from the bottom; it is the people at the top. (I have been a
CEO—trust me.)
No longer can we sell with the attitude that there is no tomorrow
or that if we lose the current sale there is another one around the corner.
That presumption of continuing sales volume with discretionary income
is diminished. No longer can the West manage as if the party will continue indefinitely.
High-salaried CEOs and their boards who cannot manage a bottom
line are unacceptable. We are now being tested as to whether we can sell
in or manage the tough (normal) times we find occurring every 10 years
or so. It is always time to get real. Many young executives have never
had to manage in hard times because they have not seen them all that
often. That is why so many are being tested managerially. Above all, the


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Overcoming a Shaky Start: Millennium Novum

3

philosophy by which we sell, market, and manage goods and services is
being tested. We will either come up roses or push up daisies!

I believe the Ivy League university business model of chasing maximum market share by increasing sales and trampling competitors to do
it is flawed. In this book I ask you to study carefully the MoneyMath
charts that prove mathematically that price is the strongest strategy, and
that a balanced company selling quality will outperform the sell, sell,
sell approach.
The three industries standing out with poor management practices leading to major problems (and opportunities) seem to be retailers, airlines, and the auto industry. I hope this book will help some of
them see that higher profits are possible. General Motors, for example,
right up to 2006 has run discount sale after discount sale, losing billions every time and never learning the lesson. It will go broke soon
unless it changes direction.
The recent corporate busts have been extraordinary in terms of financial plunder and damage done to the ordinary investor and employee. Many of those who perpetrated the plunders are still walking
the streets as free people, as if they never did anything wrong. The sense
of right and wrong seems to have eluded a lot of them and they carry on
regardless.
Combine all these events and you have an astonishing grand entrance to the third millennium, and certainly at the level of business
where most of us earn our living.
Do you want the good news or the bad news? To establish the issues
and problems that I think need addressing, let’s start with corporate busts
first and finish with the good news in the final chapters.

Corporations Gone Bust
Table 1.1 lists 35 of the largest corporate bankruptcies that have occurred since 1970.