In today’s economy many business people are looking at all kinds of ways to improve profitability. A wise man once told me that business is simple… make more than you spend!
But many translate this to mean cut as much in expenses as possible. Cut everything that is not an absolute survival necessity. WRONG! This is the worse strategy during an economic slowdown. My advise is to focus on getting a better return on your investment.I have outlined below some powerful yet simple advice on how to improve R.O.I. (return on investment). Increase volume Sell more of what you have. Here are some ideas how:Increase sales per customerThe largest amount of effort and expense goes into getting new customers. Why, because if your advertising yields a response rate of 2% then your doing well. Once they become your customer, you know who they are and can target them directly. Can you offer your existing customers more products or services ? See what happens to profit if you increase volume by 5%.Increase the number of customersIncrease capacity. If you have a big backlog of orders, are short of space or your people or machines can’t handle any more volume maybe you need to increase capacity. One of my favorite low-risk ways to increase capacity is to subcontract some of the work, especially if the increase in volume is non-recurring. This ties in with the collaboration philosophy which I often talk about. Of course you must ensure that the subcontractors work is satisfactory, they can deliver on time and they will not solicit your customer directly. Your cost of sales maybe higher, but your increase in sales will more than compensate.Increase PricesAre you charging all you can for your products or services. This question addresses how you set prices for your products and services. If your products and services have competition, then your prices cannot be significantly different than your competitor’s prices. Price is generally inversely proportionate to volume. Meaning that the more you charge, the less you’ll sell. What would happen to your volume if you increase prices by 10%? Will volume decrease by more than 10%? Will the customer’s you lose be the most undesirable ones, the ones that have the lowest profitability, give you a hardest time or cost the most to collect?Change your sales mixThe sales mix if the proportion of sales coming from different products or services). Are you spending a lot of effort on products that don’t generate enough gross profit? Maybe you should stop selling them or raise prices for these specific services. See what happens if you increase the volume of the higher gross margin product line by 10% and decrease the lower gross margin product by 10%. The idea is to focus on product or service lines that generate the highest gross profit.Reduce expensesEasier said than done! This is sometimes the hardest thing to do. Which expenses are to be cut and by how much? More importantly, what affect will the expenses have on sales? In fact that is the one question one should ask when doing any type of analysis. What affect will not spending on this or that have on present and future sales? Quantify it! Spending $200 a month on meals will generate $X in new business or my employees with be $Y more productive. Here are some tips to help you along the way.
Cut the fat – Look at each expense item line by line. Do you need all the telephone lines and cellular phones. Is the travel that you’re doing resulting in sales. Can you do with less office space. Are your employees productive? Do the employee have enough work or can you reduce staff and group responsibilities? Indeed if you cut staff then some employees will be laid off and moral may suffer, but if you go out of business, no one will have a job!Don’t cut into the bone – Some expenses you need to continue to incur because if you cut them you will jeopardize current and more importantly future sales. A prime example is manpower for product development or strategic planning. These ensure your future growth and profitability. Another expense which is difficult to cut is advertising and promotion. Indeed those trade shows and magazines ads are expensive, but if no one knows about you, then how are you going to sell. The idea is to target advertising so you have the maximum impact on sales.Understand the Difference Between Profit and CashThe Small Business Administration claims that most business failures are directly related to lack of cash flow. Many businesspeople will tell you that their profits may be skyrocketing but they are in a cash squeeze. How can this be? – Profit & Loss is calculated by deducting expenses from sales whereas Cash Flow is calculated by deducting cash disbursements from cash receipts. So if you receive the cash from your customer at the time you deliver the goods and perform the service, then sales and receipts from customers will be the same. If you give credit to you customer, then sales happen at the point you deliver the goods or perform the services whereas receipts from customers happen when you actually receive the cash associated with that sale.Improve CollectionsWhen you extend credit to customers you create a receivable which has a potentially negative effect on your cash flow. I advise my clients to measure their cash flow on a weekly basis. This can be done by preparing an aging of receivables. This involves calculating the amount of receivables owed based upon the time period owed. In other words, how much of your receivables is over 15, 30, 60 or 90 days past due. If your terms are net 30 days yet 50% of your receivables is over 30 days then they are past due. This will create a severe strain on your cash resources. I recommend that no more that 10 to 15% of receivables be more than 30 days past due. There are a number of ways to improve collections.Offer an early payment incentiveFor larger, high volume clients, a personal approach is recommended. Take the client to lunch and discuss it. Develop some creative letters that can be sent after a 15 days past due so they never get to 30 days. Establish a person within the company as the collections clerk that will call on behalf of you.Make Change Happen!I hope these ideas help you in improving both the cash flow and profitability of your organization. In my upcoming “All Day Workshop” I will be be demonstrating how to develop and implement a simple profitability and cash flow test on a monthly basis. I will be giving each attendee a sample of a custom spreadsheet that I have developed to accurately forecast sales and profit months in advance. This strategy has been invaluable to me and some of my customers.