How to Double Your Profits and Save Your Life – Part 4

So let’s keep looking at ways to plug the leaks in your business. Last time we discussed increasing your staff productivity, reducing your direct costs, and reducing your overheads. Today, we’ll talk about another leak you must recognize and fix: your non-performers. So let’s keep looking at ways to plug the leaks in your business. Last time we discussed increasing your staff productivity, reducing your direct costs, and reducing your overheads. Today, we’ll talk about another leak you must recognize and fix: your non-performers.

Option 5d – Fix your Non-Performers

Some potential non-performers include:

● You could be losing ONE THIRD of your potential sales and profits because of poor inventory management. It’s not unusual for a non-managed inventory to result in a mere 65% of immediate availability. We recently put a measure in place for a business that highlighted over $10 000 of lost PROFITS per month; all related to purchasing behaviours because of poor inventory management.

 

● Categorise your inventory into A, B, C and D items.

 

o ‘A’ items generally comprises of 5% of the inventory, but up to 50% of your gross margin. Aim for 98% immediate availability for these few vital items.

 

o ‘B’ Categories provide another 30% of margin from the next 15% of items; so aim for 92-95% immediate availability.

 

o ‘C’ items cover the next 45% of items for only 15% of your margin, and you can quite cheaply obtain 85% immediate availability for these.

 

o ‘D’ category items cover the rest; items that haven’t sold. Get rid of your Ds as serious loss-leaders in your discount sale. If you can’t salvage them, be ruthless. Then start clearing up the worst of your Cs because they are rarely worth stocking. They take up space that more profit generating products could occupy. They also take additional labour to manage.

 

● We provided a client in Australia with proper inventory management strategies and reduced their inventory by $2 million (additional cash in hand). They then achieved the availability targets given above. We also implemented 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 enabled us to maintain a comprehensive catalogue.

 

● With a smaller retail client, we sold out excess inventory of $100 000 over a period of 12 months (cash flow), thereby doubling sales and profits over 3 years. This was done in the same retail space, and all because of better inventory management.

 

● See what can be done to improve these products and to make them more competitive. Perhaps there’s a simple design change or a color revamp that will give your products fresh life. If your business is a restaurant, look again at your menu and item placement. There’s loads 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 of our clients and saw an increase of 25% in sales—mostly of items with good margins. The overall net margin impact was down by only 2%.

 

So what can we expect after implementing Option 5? Some typical improvements you could expect are as follows:

 

a. An increase in staff productivity – and a decrease of 15% in expenses

 

b. Reduction in sales costs – and a profit improvement of 5%

 

c. Reduced overheads – with an expense decrease of 5%

 

d. Inventory improvements – along with a 25% increase in sales and profit

 

 

Item Start Previous Productivity COS Overheads Inventory Increase
Change -15% -5% -5% 25%
Sales 100,000 180,895 180,895 180,895 180,895 226,119 126%
Cost of Sales   60,000 98,670   98,670   93,737   93,737 117,171 95%
Gross Profit   40,000 82,225   82,225   87,159   87,159 108,948 172%
Gross Margin 40.0% 45% 45% 45% 45% 48% 137%
Operating Expenses   30,000 40,000   34,000   34,000   32,300   32,300 8%
Net Profit   10,000 42,225   48,225   53,159   54,859   76,648 666%
Tax (25%)   2,500 10,556   12,056   13,290   13,715   19,162 666%
Net Profit after tax   7,500 31,669   36,169   39,869   41,144   57,486 666%
Profit Margin 7.5% 17.5% 20.0% 22.0% 22.7% 25.4%  

 

Would you be happy with that?

Option 6 – Increase your Volume

 

Now let’s give some attention to Option 6

● A typical strategy among business owners is to open up more sales outlets. You can certainly create more profit this way, but it’s only the sixth best option; and best left until your supporting systems are rock-solid. It’s also best to wait until all the above changes have been implemented. This option often involves the most work, most risk and most cost. There are additional expenses involved in managing multiple outlets as well as a much harder management function.

 

● Another way to increase volume is to sell wholesale or through other outlets. The key here is more volume with lower margins. This reduces your overheads but also reduces your profit per unit shipped. You therefore need exceptionally good processes to optimize your return.

 

I hope you have gained some insight by reading about these 6 options. Try implementing some or all of them and start to see your business grow.

 

Graeme Stevens
CEO and Co-Founder
neXtep easy
www.nextepeasy.com

 

neXtep Business Builder Community Pte Ltd
Singapore ACRA Business Registration Number: 201424522Z
80 Kitchener Road #09-09/10 Singapore 208539