Profit improvement occurs when revenues are increased, costs are decreased, or preferably both. Profit improvement is frequently not as difficult as it may first seem. And it can bring huge rewards in the cash flow game.
There are quite a few people out there who believe that the operating costs of most businesses contain waste in excess of 30%. Also many quality consultants have identified up to an additional 30% in cost reductions through improved Quality Management techniques such as the “Getting it Right the First time” (read Philip B. Crosby’s excellent work on this).
In other words, operating costs can often be significantly reduced without affecting your business’s performance.
Basically, the Profit Improvement Process is a line by line analysis of your profit and loss statement. You look at each component part individually to identify opportunities to increase revenues or reduce costs. Also it is about benchmarking against other similar businesses – how do you measure up against your competition? And finally you need to create a planned budget to identify variances for corrective action as we going forward.
These are usually best done by someone other than the business owner or manager. The reason for this is simple because you are so close; it’s often difficult to be objective.
Here’s what ICT Execs would do with you to develop Your Profit Improvement Process.
Part 1 – Your Revenues
The first step in the profit improvement process is to look at revenues. Revenue improvements come from answering the following questions in these areas:
- What is your customer retention like? The time & cost of obtaining a new customer is significantly greater than the cost of maintaining an existing customer. Loss of customers means loss of repeat business, which in turn means lost potential for more revenue.
- What are your margins like? Looking at profit margins can reveal a number of opportunities.
- Are products and services properly priced?
- Is there wasted time in your staffing arrangements? Could staff productivity be improved to reduce staff costs in the delivery of your services?
- Are profit margins improving or declining over time and why?
- When did you last increase your prices?
- Could you add more value to your service or bundle services to justify a premium price?
- Can costs be renegotiated with suppliers? A business can often demand better prices from its suppliers but no-one has even thought of asking.
- What about your services mix? Frequently different services yield different margins. Changing the service mix can have a significant impact on your overall profit margin.
- Is your business model a low volume high margin model or a low margin high volume model? The ideal structure for each will vary greatly.
- What would be the impact of a price increase? Sometimes price increases are avoided because of the fear of lost business. But all well run companies aggressively price and recognise that a few lost sales in return for a more profitable business are an acceptable trade-off. Price testing will identify the effect of increased prices on the demand for your services.
- What is your value proposition? Frequently price is not the issue, the value proposition is. Is your value proposition clear to the purchasers of your services? Can they differentiate between your company and your competitors?
I am not an accountant – and many of my best friends are, so I Respect what they do. I am a technology driven business man, so if I can answer these for my business, I can certainly help you answer them for your business.
The next articles will discuss the next steps in the profit improvement process we follow – so keep coming back here for more. Or if you cannot wait and want a free discussion with Phil about the specifics relating to your business then call or email directly our details are here.