In the last issue, we spoke about the different ways of increasing your business profitability, with four options. While sales increased “only” 80%, Net Profit increased fourfold and Net Margin more than doubled.
Remember, Net Margin is the only real focal point for your small business. Lack of cash flow is the symptom of death by profit margin starvation. So if you want time to enjoy life more then work on improving net margin.
The two profit generation options to be considered now are:
- Plug the leaks:
- increase your staff productivity
- reduce your direct costs (ie cost of sales)
- reduce your overheads (ie operating expenses)
- fix your non-performers
- Increase your volume
Option 5a – Increase your Staff Productivity
- Do you measure your per staff outcomes, who is effective and who is not?
- Sales value and pieces by staff member
- Sales Conversion rate
- Average sale value
- Production pieces rates
- Office transactions processed
- Do you have a program to reduce the amount of duplicate data entry that typically occurs?
- Have you established Business Rules used to drive your system?
Option 5b – Reduce your Cost of Sales
- Let’s say you can negotiate with your suppliers to improve the supply chain, with a subsequent 5% decrease in cost of sales.
- That is an additional 5% that flows straight through to the bottom line on current sales.
- Difficult? With one major supplier, we negotiated a new method of service provision and both went away smiling; my company’s costs reduced to a quarter of their previous while the supplier made more money too because his overheads were very much lower.
Option 5c – Reduce your Overheads
- Salaries and their related overheads are often the largest areas of operating costs. It’s not difficult to design and implement systems and procedures that need fewer people, especially once you have defined your business rules and allow them to drive the process. Integrated systems that follow the flow of products, cash and information across functional lines reduce the need to duplicate input.
- With one client we are in the process of replacing over 50 Excel worksheets with one integrated database, and the improvements in management control and reduced staff needs are dramatic.
- Improve your data accuracy with barcode input.
- It’s faster than typing and error-free, so the work needed to find and correct mistakes are eliminated.
- Stocktakes by barcode take hours instead of days, so they are more accurate in a dynamic selling environment.
- We implemented barcodes with the point of sale computer at the Yoga Shop tent at BaliSpirit Festival two years ago, to help handle the berserk volumes from the crazy prices offered. Sales went up 45% on the previous year mainly because they had immediate insight into what was selling minute by minute and could organize rapid replenishment from the Gudang. Sales and profit figures in total and by item were available at any time, so that changed strategies could be implemented on pricing and availability. And the final management report was available within 48 hours of the final sale and stock putaway, so management and staff could get back to normal business faster.
Option 5d – Fix your Non-Performers.
- You could be losing ONE-THIRD of your potential sales and profits from poor inventory management. It is not unusual for a non-managed inventory to provide only 65% immediate availability. We put a measure into one business that highlighted over Rp 100 million per month in lost PROFIT due to poor purchasing behaviors and tools.
- Categorise your inventory into A, B, C and D items.
- Items generally comprise 5% of the inventory but up to 50% of your gross margin. Aim for 98% immediate availability for these few vital items.
- B Category gives another 30% of margin from the next 15% of items; aim for 92-95% immediate availability.
- C items cover the next 45% of items for only 15% of margin and you can get 85% immediate availability quite cheaply for these.
- D category items cover the rest – items that haven’t sold. Get rid of your D’s as serious loss leaders in your discount sale if you can’t salvage them, be ruthless. Then start clearing up the worst of your C’s because they are rarely worth stocking. They take up space that more profitable products could occupy. They take additional labor to manage.
- With one client in Australia, with proper inventory management, we reduced inventory by $2 million (that’s additional cash in hand, folks) and achieved the availability targets given above. We also had a business rule to dump the very slowest movers and buy them at retail from their competitors – it was cheaper than holding them yet still gave a comprehensive catalog.
- With a smaller retail client in Bali, we sold out excess inventory of Rp 1 billion over 12 months (cash flow) and doubled sales and profits over 3 years. All in the same retail space, all from better inventory management.
- See what can be done to improve these products to make them more competitive. Maybe there is a simple design change or color revamp that will give them fresh life. If your business is a restaurant, look again at your menu and item placement. There is a lot of good advice on the internet about menu design that can have a major impact on ordering outcomes.
- Reduce the price on non-performers and put them on sale as loss leaders. We did this with one client and saw an increase of 25% in sales, mostly of items with good margins. The net margin impact was down just 2% overall.
What’s the impact of applying Option 5?
Some typical improvements you could expect are as follows:
- Increase staff productivity – expense decrease of 15%
- Reduce cost of sales – profit improvement of 5%
- Reduce overheads – expense decrease of 5%
- Inventory improvements – 25% sales and profit increase
|Cost of Sales||60,000||98,670||98,670||93,737||93,737||117,171||95%|
|Net Profit after tax||7,500||31,669||36,169||39,869||41,144||57,486||666%|
Would you be happy with that?
Option 6 – Increase your Volume.
- A typical option is to open more sales outlets. You can certainly create more profit but it’s the sixth best option, and best left until your supporting systems are rock-solid, and all the changes above have been implemented. This option often involves the most work, most risk, and most cost. There are additional expenses involved in managing multiple outlets and a much harder management function.
- Another volume option is to sell wholesale, or through other outlets. More volume with lower margins. This reduces your overhead but reduces your profit per unit shipped. So you need exceptionally good processes to optimize your return.
Is there is any aspect of developing a successful business you would like me to write about?