Is this real profit? Really?

Do you know the difference between “real-profit” and “risk-profit”?

A real-profit is the reason you are in business, while the risk-profit is the profit that is related to a risk that is not in your core business and that you should spend (or invest) in a way to reduce your risk, and to protect the real-profits.

Business case one

A client CEO of mine was telling me that his company board lacks focus about their succession planning and he was finding it difficult to emphasise its urgency and importance to many members.

We estimated a business insurance cover of about $40,000 a year for each of these key positions. With five directors on the board, this is about $200,000 a year of “risk-profit”. While it is very unlikely that all five directors will get hit by a bus together, any risk on any of the key directors will put a dent in the company’s profitability and long-term viability. This risk-profit must be invested in finding, training and keeping talent in order to protect the longevity of the company.

I recommended to the CEO that the company purchases these insurances out of the risk-profit and takes them out of the board bonus pool. Each board member will need to demonstrate to the board that he has a “ready now” talent available to take over from him. Only then will the relevant insurance be cancelled and the premium returned to the bonus pool.

This article can be read in full on Walid’s Blog.