There are a variety of things to focus on when you run a business on a day-to-day basis. Increasing sales, improving customer service, developing new products, are all activities that increase the value of a business. However, sometimes, in the need to react to the daily pressures of the marketplace and the challenge of effectively managing employees, we tend to focus less on increasing profitability than we should.
In this article, I’m going to give you a variety of actions that a business owner or a manager can take to improve profitability. This list can serve as a source of ideas to improve profits or as a checklist to help you be sure you are taking the necessary steps to improve profitability.
- Employee salaries and wages and employee-related costs are the largest cost category for most companies. Excluding costs related to goods sold, people-related expenses are generally more than fifty percent of operating expenses. Therefore, to achieve and maintain high profitability, it is essential that every employee makes a contribution that exceeds his or her cost to the business. So, in practical terms, this means:
- Review your employees. Is each of them contributing to the business in a positive manner? Examine your weaker performers. Do you really need them? Could you cut two weaker performers and replace them with one strong employee?
- Review your organizational structure. Can you reduce administrative/overhead employees by making changes to the organization? Do you have people performing administrative duties that are no longer necessary? Can you eliminate activities that no longer have value and, thereby, free employees to do things that create more value?
- Loyal and competent vendors are important to all organizations. However, it is important to periodically evaluate vendors to make sure they are still providing value. As you do this, remember that value is not just about the cheapest cost. Some distributors and vendors provide value-added services that other vendors would make you pay for. Some vendors work with you as though they were a partner while others seem to always be trying to make another dollar off their relationship with you. In addition, don’t become overly enamored with vendors who spend a lot of money entertaining you. Remember, their customers – meaning you – are really paying for their generous entertainment of you.
- Examine the profitability of your relationships with your largest customers. Are those customers your most profitable relationships? Or has the need to retain them – simply because they are a large customer – become so important that you are spending money on a significant number of activities to service these customers and not truly getting paid for your efforts?
- The reality is that some customers need to be fired. They are very demanding and seem to need to “win” every transaction. They have convinced you that you cannot survive without their volume. Or they have become so difficult to work with – they dominate the time of you and your staff so much – that you cannot adequately service other customers that are more profitable.
- One of the most important elements of profitability is gross margin. Gross margin is the revenue generated by your sales after the cost of sales is deducted. Improving gross margin is one of the most effective ways to increase profitability. Improvements to gross margin increase the value of every dollar of sales. Here are a few ways you can improve gross margin:
- Negotiate lower costs for your product costs. This can be in the form of direct cost-reductions as well as by getting rebates on products and services purchased for cost of goods sold.
- Reduce freight and shipping costs for both products purchased and for your delivery of products. With the current low fuel costs, consider asking your freight company for a fuel rebate. Also, periodically get new freight quotes from different vendors to make sure that you are getting the best possible price.
- Look for ways to run your product delivery function more efficiently. Consider bringing in a logistics expert to analyze your distribution operations to look for efficiencies. If you have traditionally run your warehousing operation with a large number of low wage employees, examine whether or not a smaller but higher paid staff would be more efficient.
- Review your facilities cost. Is your facility the right size for your operation? Has your need for space declined since the recession, leaving you using only a portion of your space? Or, are you so cramped, due to growth, that the lack of space impairs your profitability?
- Even if the size of your facility is not changeable, you may still be able to reduce facility related expenses. Have you gotten a competitive insurance quote recently? Have you considered having an expert review your personal property and real estate taxes? Are there opportunities to reduce your utility expenses?
There are many other ways to increase profitability. The list above is just a start. But the most important thing is that you, as a business owner or manager, develop the attitude that you will consistently think about and look for ways to increase profits.
As you teach yourself to think about how you can make productive changes to your business, you will find that you will begin to see opportunities to improve profitability more frequently. In other words, you will become a more effective manager of productivity and profitability.