A few weeks back, we discussed the importance of monitoring numbers in your business. Financials truly are the ultimate scorecard, and focusing on them will put you and your team on the path to success.
This week, let’s drill down on profitability and tactics you can use to drive yours.
Academics and CFOs have identified seven main levers you can pull to increase profits:
Price. Increasing your prices drops money directly to your bottom line. The cost of living generally increases on an annual basis, and many of us give annual raises to our teams to keep pace, yet we don’t increase our top-line pricing. If you haven’t raised your prices lately, reconsider if it’s time to.
Volume. In a basic sense, selling more units creates more economies of scale in your business. Assuming you have priced your offerings right, selling more should deliver increased efficiencies.
Cost of Goods Sold. Reducing the amount of money you spend on raw materials and your direct labor costs will always increase profitability. When is the last time you looked at reducing your cost of goods sold?
Operating Expenses. Finding ways to reduce your expenses, or your overhead as it’s commonly called, directly increases your net profit. Small items can really add up in the expense category, especially when they’ve always been there and you’re in the habit of automatically paying them. Take another look at yours and see if there’s money you can save there. For example, have you had your insurance rates re-quoted lately?
Accounts Receivable. As we mentioned a few weeks ago, having a dedicated person to ensure that collections are a priority will reduce stress and ensure your cash flow remains stable. How efficient is your receivable process? Do you have a team member dedicated to collections?
Inventory. How much stock do you have at your company? Are you tracking the amount of inventory you’re turning over? A low turnover rate can tie up cash and drive down profits. On the other hand, not having the stock you need when you need it can result in lost sales. Keep your focus on aligning your inventory and sales levels.
Accounts Payable. Just as with accounts receivable, dedicating a team member to managing your company’s payable process stabilizes your cash flow and reduces stress. Consider asking your vendors for extended payment terms, but tread carefully. If you have a great relationship you don’t want to jeopardize it, but telling a vendor you’ll use them as your sole provider if they move your payment terms from 30 days to 60 might be a win for both of you. Also, don’t forget that a credit gives you an automatic 30 days to pay it. Just don’t become late on your payments.
These levers may seem simple at first, but the power of them in combination can lead to tremendous results. Focus on one each month for the next seven months and you’ll be amazed by the aggregate results. Even a 1% improvement in each of these would increase your profits significantly.
Have a great week!
The MGI Team