When you have consistent revenue growth you have built a strong business, but revenue is only worthwhile if it is delivering profits. After all, that’s why you are doing it. So when you’ve reached that stage of your business lifecycle and have become accustomed to driving marketing and sales, how do you improve profit?
A common way to improve profitability, is to start looking at the business from different perspectives, and to analyse performance from each of those perspectives. Here are some areas to consider –
Gross Margin – this is simply revenue less direct costs, which direct costs being the cost of producing the product or service. How can you improve your gross margin ? Can you look to suppliers and review how and in what quantities you order materials. For services, is there technology available to reduce labour costs?
Overhead – these are the fixed costs of running a business. Is there anything you can do to build efficiencies, like better software, or have you considered outsourcing some tasks or functions. Every $ of overhead you can save is another $ of profit !
Underperforming products – rarely in a business will all product lines be performing equally well at all times. If you look at Gross Margin across all your product lines some will be stars and others dogs, so what can you do to sell more stars and less dogs ? Can you change your processes to improve the margin on the dogs so that they become stars also?
Business unit performance – whether you divide up your business by location or by function, each business unit will be performing at different levels at different times. Some may have high performing teams and others are struggling. You need to look at each and why, and try learning from the successes. Improving the results of an underperforming business or discontinuing a loss making business can have a big impact on your results
Customer profitability – there are many examples of cases where a small business has had a lot of small customers and then wins a large contract with a major organisation. In many cases, their margins have been driven down in the negotiating process, and the business becomes reliant on the high volumes from this new large customer. What often happens is that large customer then places excessive demands and you can end up with all your staff focussed on keeping them happy, to the detriment of the smaller profitable customers. You need to have clear strategies how you manage the scope for this large customer, how you can charge for additional out of scope work, and even be prepared to walk away.
Under-utilised capacity – if you have a good business model, one that can deliver a consistent product at a consistent cost with limited impact on overhead, some marketing activity to increase your volumes will have a direct impact in improving profitability. If your current utilisation is at 50%, you have the potential to increase volumes to 80 or 90% capacity with little incremental cost. This can have a profound impact on profits.
Project or Contract Performance – are all your projects and contract performing to plan. Are their any items in your pricing model that require review based on performance. Are there any projects or contracts consuming more overhead than allocated, meaning they are not delivering the gross margin that you think ?
In reviewing your profitability, information is the key to understanding and analysing your business. Your accounting system sits at the core of this and you may need to review your systems so that you can access up to date profitability data to help you make the right decisions. After all, you wouldn’t buy a car without a speedometer.
Sometimes these decisions need a different perspective so having a trusted business partner or advisor who will look at things differently can be a real advantage. You’ve done well to get the business established to where it is, don’t be reluctant to seek out people with the right skills to get through the next stage of your growth path.
ABOUT BRIAN DOUGHTY
Brian Doughty is founder of the outsourced CFO which is a part time CFO service for small to medium sized businesses. Brian’s experience in large corporates and small business is unique and has enabled him to develop a simple to understand set of tools which will help business owners engage staff, monitor performance and achieve their goals. For more information, visit www.theoutsourcedcfo.com.au.