Tips for Profit Growth

Many established firms are still struggling with the economy and are not sure if they are winning. Sales might be recovering, but profitability is still down, and cash flow has barely broken even over the last 12 months. They have cut back costs as far as possible, reducing staff, overhead, purchases and even marketing costs, but what comes next. Unless new sales can be more profitable the outlook is bleak. Here are some steps you should be taking now to boost your Sales and Profitability:

  1. Number one; understand your real profitability drivers. Do you really understand why you made or lost money last month? It is a complex combination of your revenue levels, your fixed and variable expenses, and your product mix of low and high margin customers, jobs or products. If all you have to explain your profitability is a typically inadequate QuickBooks-type P&L listing of revenue and expense items, then you probably don’t have a good understanding of your profitability and simply cannot begin to take corrective actions and drive improvement. You MUST know your margins by individual product (or service), by product line and by customer, and understand your other profit drivers.
  2. Re-calculate all of your overhead rates. In the past year, you have probably trimmed many costs and your materials and services costs have probably changed. In addition, your overhead base (number of machine hours, consulting hours, or service hours, etc.) has also probably dropped. Lower costs mean lower overhead rates. Lower base hours mean higher overhead rates – since you’re spreading costs over less “billable time”. If you haven’t developed overhead rates to really understand the true cost of individual products or services, now is the time. You might be find that you can actually sell at lower prices now and pick up sales volume. Or, you could find that you are losing money with each sale because your costs have not come down in proportion to your “production hours”. Note that this analysis applies to service firms as well as manufacturers. Service firms: do you know your hourly cost rates for direct, administrative, and overhead costs?
  1. Re-calculate all of your overhead rates. In the past year, you have probably trimmed many costs and your materials and services costs have probably changed. In addition, your overhead base (number of machine hours, consulting hours, or service hours, etc.) has also probably dropped. Lower costs mean lower overhead rates. Lower base hours mean higher overhead rates – since you’re spreading costs over less “billable time”. If you haven’t developed overhead rates to really understand the true cost of individual products or services, now is the time. You might be find that you can actually sell at lower prices now and pick up sales volume. Or, you could find that you are losing money with each sale because your costs have not come down in proportion to your “production hours”. Note that this analysis applies to service firms as well as manufacturers. Service firms: do you know your hourly cost rates for direct, administrative, and overhead costs?
  2. Negotiate hard with vendors and show them how it can actually be good for them. If you can lower your costs and drive more sales, both you and your vendors will benefit. If your vendor won’t play ball, then it’s time to talk with more new vendors. Check the increases from your vendors against industry price indexes. We found one founder had pushed through three price increases totaling 16%, but the industry index was only up 6%.
  3. Review your quoting model. Does it include your new, lower overhead rates and purchase costs? Does it show you your true cost of delivering your product or service? Does it show you the true effect on your company of winning the business? Your quoting model should break out incremental costs and show you what the effect on cash, overheads and profit from producing or servicing the quoted business. You can’t make it up on the volume, but you can dig a deeper hole!
  4. Use your new lower cost structure and quoting model to develop pricing strategies to drive new sales, and to evaluate your current business.
  5. Analyze and rank your customers using the above tools and an 80/20 analysis. You may find you can reduce more costs by ridding customers that use many resources but don’t contribute much.
  6. Develop detailed action plans to improve each of your main profitability drivers. Assign an action oriented leader to head a team to analyze and improve each profitability driver and write down the specific goals, tasks, due dates and follow-up dates required to ensure each profitability driver is improved. Set up a KPI (Key Performance Indicator) for each of your profitability drivers and chart its historical values vs. its new target values.

photo credit: Financial statistics and accounting concept via photopin (license)

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