The Profitability Epidemic
There is a profitability epidemic lurking amongst manufacturing and trades businesses. Although a large number of businesses in these sectors are flourishing there are many well established businesses that employ five to fifty people who struggle to break even. In many cases the owner earns the same as their employees and works over seventy hours per week. Not exactly what I would call “living the dream”
The consensus is that if we just work harder it will get better. It’s time to stop working harder and to start working smarter. The good news is that, in many cases, after making a few adjustments the road to profitability is just around the corner.
Are you suffering from the profitability epidemic? Here are 5 areas and some of the factors I review to improve profits and cash flow:
- Benchmark against your competition. You may be charging too little and leaving profits on the table
- Increase prices regularly. Customers expect inflationary increases. As a result, small price increases on a regular basis will be more readily accepted than a large increase every few years.
- Monitor/control discounting by the sales team. Have firm controls in place. Giving discounts should be very painful for sales people.
2. Micromanage Labour To Improve Productivity
- Employees need to understand what is expected of them with clearly defined production goals. As a result, they will often rise to expectations you have set.
- Develop KPIs to monitor productivity. Decide on the measuring tools you need and keep a close eye on labour costs. Ratios measuring labour to sales is an easy and effective KPI.
- Outsource if there is not enough work to justify a position. Many business owners carry more employees than revenue can justify.
3. Review Production Processes to Minimize Waste
- Build a waste factor into your COGS. Do you throw out unused product? Be sure to build a waste/spoilage factor into your product cost.
- Develop KPIs to monitor waste levels on a regular basis. Investigate when something seems “off”.
4. Itemize & Cost Every Component of Your Product
- Break down your production/service processes into every step. Account for all incidental labour in your costs.
- Factor any supplies used to produce your product/service into your costs.
- Account for all costs related to packaging eg. Labels, master packs etc.
5. Ask For Lower Pricing From Suppliers
- Many businesses overlook this. Ask for discounts; you will be surprised on how much money you can save.
Evaluating the above areas may seem to be no brainers but the fact is that most business owners get so tied up with fighting fires and daily tasks that they take their eye off of the ball. The major difference between the profitable business and the struggling business is the owner’s attention to the five key areas of profitability. Looking after these 5 areas will go a long way towards ensuring you are not part of the profitability epidemic.
For another article related to this subject, go to: 3-steps-to-increase-profits-by-50000-in-one-year/