The Profit Improvement Process Part 2 – Your Costs

A previous blog article on profit improvement shows that this occurs when revenues are increased, costs are decreased, or preferably both.  That article looked at increasing your revenues and margin, so now let us look at the direct costs and resulting gross profit margin by answering the following questions in these areas:

  • How does your business compare to others in your industry, as benchmarking gross profit is a critical discipline when looking for profit improvement processes and solutions. It lets you evaluate whether your business is in line with best practice.
  • What are the component parts that make up your costs of producing revenue?
    • Are these costs comparable with others in your industry?
    • Are your costs organised in a fashion that allows for proper measurement?
    • What can you do to reduce these costs?
  • Have you identified your variable payroll costs? Have you taken into account and applied all associated payroll related costs?  Every pound saved in this area drops directly to the bottom line.

Administrative Sales and Marketing Expenses.  A line-by-line look through your overhead costs will usually result in significant profit improvement opportunities.

  • Personnel costs normally represent the single major expense in service companies, the result of headcount, compensation practices, and benefits.
  • Do you have the right number of people?
    • Too few results in excessive overtime
    • Too many results in unnecessary cost
  • Have personnel numbers been adjusted for changes in your business?
  • Are you complying with employment laws?
  • Are independent contractors really independent contractors?
  • How does your people’s compensation compare to others in your industry?
  • Is your benefits package cost effective?
    • Do you have employee incentivisation schemes?
    • Is your benefits plan maximised for tax advantages?

Sales and marketing expenses need to be budgeted and adequately controlled.

  • Have you investigated the cost per copy of a printer versus internal publication on colour copiers?
  • Are sales commission incentives properly aligned with the company’s goals? Incentives always drive behaviour so it is critical to reward the right behaviours.
  • Do you know which sales and marketing activities are working for you and which ones are wastes of your money?
  • Telecommunications costs can often be significantly reduced over time. The industry is highly competitive and arrangements should be reviewed when contracts come up for renewal.  Consolidation of carriers to improve purchasing power, taking advantage of additional no or low cost service offerings using the internet and eliminating duplication of services will all add up to substantial expense reductions.
  • Insurance costs. Are limits properly set and are you partnering with your insurance broker for credits associated with loss prevention programs?  Have changes in your business been properly reflected in your insurance cover?
  • Costs of capital can include excessive interest costs, lost prompt payment discounts, and late charges. Elimination of these items can result in substantial profit improvement.

The following 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.

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