One of the major concerns that shows up in surveys of business owners is how to improve and maintain profitability levels. Competition levels always seem to be on the increase and margins are continually being squeezed. The end result is that we work harder for less profit.
Here are a few thoughts on how to protect your profit margins:
- Know your numbers. Regularly measure how your business is travelling financially. Too often we find business owners who think that they are not capable of reading and understanding financial reports and use this as an excuse not to regularly review their financial position. Sorry, if you are responsible for a business, then knowing how it is performing is in your job description and it is not difficult to learn how.
- Use your financial reports. There is a goldmine of information in a Profit and Loss (P&L) report if it is structured to provide management reports rather than just as a means of providing input for a BAS or an income tax return. Your balance sheet can also help you manage your cash.
- Manage your gross margin. Your gross margin is the difference between what you sell something for and what it costs you to buy it or get it out of the factory ready for despatch. It will mean that you are managing your selling prices and input costs.
- Manage your selling expenses. Summarise your expenses into meaningful groups such as communications, vehicles, property, employment costs etc., so that you are looking at a manageable P&L statement. Set targets for each group relative to your revenue.
- Eliminate waste. The average amount of time spent value adding to a piece of raw material from the time it enters a factory until it is a finished item ready for sale is less than 10%. The rest of the time is one of the seven categories of waste identified in Lean Manufacturing theory. They all add to your cost and reduce profit margins, but none of them show up on your P&L. The concepts are equally valid for office environments. Understand what they are and work to reduce them.
- Hold your staff accountable. Develop a culture where people care about what they do so that they provide great customer service but are conscious of costs. Provide them with targets/budgets and outcome reports. Have a performance management system and a recognition and reward process that is linked to your values.
- Aim for continuous improvement. Implement formal systems to continually be looking to improve how you do things. The first time that you analyse a process for improvement you may be able to halve its cost, which may significantly improve profitability. The tenth time you may only be able to reduce it by a few cents per unit. Even though the slope of the improvement curve diminishes, we can always look to improve with a view to maintaining and increasing profit margins.
Improving profitability is one of the key tasks of the business owner or manager and will require time spent working on the business, not just in it.