Erick Hamdan – who works on value creation with business owners, investors and private equity building companies – reinforces how too many companies grow their revenue without knowing if they’re actually earning a reasonable margin.
In the adage that “turnover is vanity and profit is sanity”, being profitable is critical at every stage of your business – particularly when it comes to planning your exit and grooming your business for sale – because the more profitable you are, the more desirable your business is to a performance coach prospective buyer.
As an experienced business strategist and performance coach, I guarantee your profitability will improve once you have a process in place which enables you to maximise that profit on a daily and/or monthly basis.
If you don’t, then now is the time to stop being a ‘busy fool’ and chasing turnover – which can leave you feeling permanently exhausted and ineffective – and can also send team morale plummeting.
Get out of the mindset that price is something over which you have very little control and that reducing costs is the most effective way to building a profitable business – and start focusing on the five areas below – aptly known as ‘profit drivers’.
Understand which products, customers and sales people generate you the greatest profits and why. Are they realising their full potential? If not, why not? The sales, turnover and margin profit drivers to put under the microscope are:
- Product and or service mix
- Customer profiles and mix
- Region or area performance
As with sales you should know in detail which products, customers and sales people generate you the greatest profits and why. How you can improve margins without damaging customer relations and sales? The key margin profit drivers to analyse are:
- Individual products and/or services
- The cost structure
- Market Strategy – low margin / high volume or high margin / low volume
- Credit policy – the true cost of offering credit
Are your production and distribution people making the most profitable use of the resources they have? Are they doing it that way just because they always have? Now is the time to get into lean processing in a big way. The operations profit drivers you should focus on are:
- Cycle times and product mix
- Material costs
- Operating expenses
What if you got your overheads down to less than 10 per cent of sales? Now is the time to rethink your business model. Harness the power of technology to outsource all those activities that are not core to the business, do not add value and for which the customer doesn’t want to pay. Check out these overhead profit drivers:
- Space utilisation
- Head count / productivity
- Operating expenses
Will there be enough money available to fund your future growth? Make the money in the business work harder – it all adds to the bottom line and sends a clear message to all your stakeholders about the importance of good financial management. The financial profit drivers you should look at are:
- Borrowings and bank charges
- Working capital controls
- Cash-flow management
- Credit strategy
If you would like more information on how to tap into the power of profit drivers, e-mail me via email@example.com, send me a tweet via @RichardWhatIf on Twitter, or find me on LinkedIn.