PROFIT- Why it matters and how to maximize it!
Every business leader is well aware of the need to generate a healthy profit. However, it is not as easy as most think it is. Many of my clients have had good success with operating profitably and growing. However, much to their surprise we find a variety of areas that they have significant waste and costs that do not help the business. In this article, I will share with you some areas that you can look into yourselves and improve your profitability.
First, let’s establish why profit is so important? Every business is faced with every increasing cost from inflation, healthcare pressures, employee wage growth and more. As your business grows additional investments will be needed like new software, technologies to remain competitive along with added floor space. Having more liquidity makes these investments much easier. In other words, how do you pay for all these costs and compensate yourself or the shareholders for all of the risk? Profit! So how can you maximize your profit?
Here are FIVE areas regularly overlooked by many businesses:
PRICING POLICY– Most companies struggle with the price they charge for their product or service. They worry about losing the business solely because of their price. All companies can benefit from having a regular review of the prices of all their products and services. Typically, this is on a semi-annual or annual basis. The review should include determining the profitability of each product, comparisons on competitive offerings and examining the input cost trends like material. Most companies fail to adjust their prices until they are in trouble. Here is a link to an interesting article on pricing.
MATERIAL / OFFICE EXPENSE REVIEWS– Manufacturers and restaurants especially face pressure on a weekly basis with suppliers adjusting their prices and creating additional restrictions such as quantity break changes etc. Similar to the pricing policy there should be a review process for purchases. So many times, clients have had their material cost rise 5% and held their sell prices. Depending on the percentage of material this could be a 2-3% erosion of profit. In the office side of things telecom is critical today. Companies like Schooley Mitchell specialize in helping businesses save money in the telecom and merchant services area. The plus here is they charge nothing unless you save.
RETURNS POLICY– Every good business person recognizes the value of customer service and making the customer happy. All too often though our customers find themselves wanting to return a product to us or are dissatisfied with our service. How this is handled is critical to the long-term relationship and our brand image. However, we do not have to just give money away. Making sure that our team is knowledgeable about things like freight damage, proactively educating the customer on expectations, providing samples where appropriate and more. Do your employees know what to do? Do you have established processes to manage the return side of your business. Think this is small? 11% of all on-line purchases were returned last year.
SHIPPING CHARGES– Often businesses with larger products will ship those items FOB their dock and pre-pay and add. So, the company pays the freight and adds it to the invoice. However, when you consider that you are doing the work to arrange the shipment, tying up your money and eliminating an invoice for your customer, what do you get? Progressive companies recognize this and adjust the freight invoiced by an additional 15-20%. This is simple compensation for the service provided. If you have a lot of outbound freight like this you may find a significant amount of money.
DISCOUNTS– We all know CASH is king. Now many companies offer you “1-2% net 10 day” terms. If you annualize this interest or discount it is roughly 36-72% per year. Where else can you make that on your money? If you make a lot of purchases with terms like this consider modifying your AP processes to take advantage of this.
We have looked at just 5 examples of how you might increase your profitability my guess is that I – 2 of these would benefit you by addressing them. If you want to learn more, reach out to us. We will gladly meet with you and share added ideas and techniques.
GO MAKE A PROFIT!