Profit Improvement is frequently not as difficult as it may seem. In essence profit improvement occurs when revenues are increased, costs are decreased, or preferably both. The CFOs of B2B CFO have significant experience in the profit improvement process and have many profit improvement solutions!
Proudfoot Consulting, a global consulting group, says it this way: “All work is a process and all processes can be analyzed and improved.”. They believe that operating costs contain waste in excess of 30%. Additionally, some quality consultants have identified up to an additional 30% in cost reductions through improved Quality Management techniques such as “Getting it Right the First time,” a technique attributable to the late Philip B. Crosby. That means that operating costs can be significantly reduced.
So what is the Profit Improvement process? It is a line by line analysis of your profit and loss statement that looks at each component to identify opportunities to increase revenues or reduce costs. It also means benchmarking against other similar businesses and creating a planned budget to identify variances for corrective action going forward.
The first step in the profit improvement process is to look at revenues. Revenue Improvements come from several areas.
- How is your customer retention? The 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.
- How are your margins? Looking at profit margins can reveal a number of issues.
- Are products and services properly priced?
- Does labor contain wasted time?
- Are profit margins improving or declining over time and why?.
- Can prices be increased? If not, how can costs be decreased in order to maintain the margins needed to maintain a healthy company?
- Can the cost of products be renegotiated with suppliers? Frequently a business has grown to the point that it may be entitled to better prices from suppliers, but they don’t ask to renegotiate pricing.
- Can labor productivity be improved to constrain labor costs in the delivery of products & services?
- What is your product mix? Frequently various products and services are priced differently and yield different margins. A shift in the mix of these products can have a significant impact on the overall company-wide profit margin.
- Is your business model a low volume high margin model or low margin high volume model?
- What is the impact of a price increase? Sometimes a price increase is avoided because of the fear of lost business. Other companies aggressively price and recognized that a few lost sales in return for more profitable overall sales is an acceptable trade off. Can you identify the effect of increased prices on the demand for your product or services?
- Frequently, price is not the issue, the value proposition is! Is your value proposition clear to the purchaser of your goods and services so they can differentiate between your company and your competitors?
Cost of Revenues
The sale of goods & services is best measured by the cost and resulting gross profit margin. How do you compare to others in your industry?
Benchmarking gross profit is critical when looking for profit improvement solutions. Evaluating if your business is in line with best practices and the resulting financial performance is a critical step in the profit improvement process.
- What are the components that make up your cost of producing revenue?
- Are these costs comparable with others in your industry?
- Are your costs organized in a fashion that allows for proper measurement?
- Do you properly calculate and use overhead burdens?
- How can you impact these costs?
- Are your payroll costs properly computed & associated payroll burdens properly determined and applied?
Typically every dollar saved in this area drops directly to the bottom line.
General, Administrative Sales and Marketing Expenses
A line- by- line look at this area can also result in significant profit improvement opportunities. To mention a few:
- Telecommunications costs can significantly be reduced over time. These costs are competitive and should be reviewed when the contracts come up for renewal. Consolidation of carriers to improve purchasing power, taking advantage of additional no or low cost service offerings and eliminating duplication of services can all add up to substantial expense reductions.
- Insurance costs. Are limits properly set and are you partnering with your carrier for credits associated with loss prevention programs? Are you applying for applicable credits that may reduce insurance costs such as workers compensation? Have changes in your business been properly reflected in your coverage?
- Sales & Marketing expenses need to be budgeted and controlled.
- Printing and other collateral materials should be put out to bid.
- Have you investigated the cost per copy of a printer versus internal publication on color copiers?
- Are sales commission incentives properly aligned with the company’s goals? Incentives will drive behavior so it is critical to reward the right behaviors.
- Personnel costs are the result of headcount, compensation practices, and benefits.
- Do you have the right number of people?
- Too few results in excess over time expenses
- Too many results in unnecessary expenses
- Have your personnel numbers been adjusted for changes in your business environment?
- Are you in compliance with wage & hour laws?
- Are independent contractors really independent contractors?
- How do your people’s compensation compare to others in your industry?
- Is your benefits package cost effective?
- Is your employee cost participation competitive?
- Are you utilizing high deductable HSA plans?
- Are you experiencing compliance issues in your 401(k) plan?
- Failing discrimination testing?
- Low employee participation rates?
- Do you have the right number of people?
- Costs of Capital include excessive interest costs, lost prompt payment discounts, and late charges. Elimination of these items can result in substantial profit improvement.
Take these items and create a budget for variance analysis. This will allow you to identify negative trends and other problems in order to take corrective action. Identify the drivers and metrics for your business. Combing these into a dashboard will help assure profit improvement solutions remain in place.
With average experience in excess of 25 years, the CFO services partners of B2B CFO can help lead the profit improvement process in your company by helping you rationalize your business in order to achieve repeatable and sustainable profit improvement.
Contact us to find out more about the different profit improvement solutions we offer.