Strategies to Increase Profit

As I’ve talked about before, we are either growing or dying.  I just re-read a post I did last year about this time.

I encourage everyone to understand the basic profit model for most businesses.  It works with GE, Bill’s Pizza, Boeing, Joe’s Garage, Worldwide Truck Parts, etc.  Not all businesses, but many.

The Basic Business Model:

  • Leads x Conversion rate = Customers
  • Customers x Number of Transactions x Average Transaction Amount = Sales
  • Sales x Profit Percentage = Profit

Some variables have more moving parts than other.  Number of customers is easy.  The Profit Percentage, on the other hand, is comprised of many elements: product cost, overhead structure, freight, employee costs, etc.

The basic model is pretty simple.  I created a little model to see how powerful small changes can be. Check it out here.

First, start with actual numbers.  Don’t make assumptions here. Again, most of the numbers are very easy to get.

Now peel the onion back a little and see what happens when you leverage small improvements a couple of these variables.

For small and medium size companies, I like to focus on average transaction, number of transactions per year amount, and gross profit.  For the model, I increase .25 leads per day, increase average transaction size from $189 to $225 and increase gross margin 1/10th of a percent.  The impact to this company is a 32% increase in profitability.

Strategies to increase average transaction size include:

  • Change product/service mix.
  • Offer add-on products and cross selling of similar products.
  • Reduce number of low dollar customers: increase minimum orders, train sales staff.
  • Look at your freight policy. Increase your free freight threshold.
  • Bundle/kit products together based on customer needs.
  • Raise pricing. This is never popular with the sales guys, but this can make a huge difference.
Download the simple model, develop a couple strategies to improve a couple of the variables and start tracking your basic business variables. Let’s see your profits grow!

Off and Running

Can you believe the first month of the year ended last week?  It is me or is this year is moving at warp speed?  We only have 90% of the year left to complete the personal and business goals and objectives we set for the year.

It’s important for companies not to get too detailed or be too vague.  Companies need to focus on their vital few objectives, a term from a process called Six Disciplines for Excellence developed by Gary Harpst.  The VFO’s are the few big picture goals for the year that will really make a difference.  Properly set and communicated, VFO’s allow everyone in the organization to focus on the correct targets and each department’s goals to dovetail into the company’s vital few objectives so that everyone is on the same page.

That said, how are you doing so far this year?  Get a read on your financial and non-financial goals for the first month of the year now.  How are your sales, gross margin per customer segment, new customers/patients, number of patients per day, average revenue per invoice, inventory turnover, etc.? Make any needed adjustments early to stay on track.  Again, I will emphasis the importance of a quick close to get your financial numbers early and the 80/20 principal to focus on the areas that will make a difference.  Communicate the good and the bad to your team to hit your first quarter’s targets.

Now is also the time to evaluate and recast your 13 Week Cash Flow based on January’s sales and your current overhead.  If you don’t recast your cash flow forecast weekly (as I strongly suggest), take the time now and recast inflows and outflows by week to ensure you understand your cash sources and uses.  We “finance guys” typically focus on the rear view mirror, constantly closing the prior month’s financial statements and getting through the year end audit.  The car analogy is perfect.  The real value-add for the core business though is helping business leaders look forward out the windshield and provide dashboard-like stats as to how the business is running and where the business is going.   The 13 Week Cash Flow and the business dashboard help us look forward.

With your VFO’s and cash flow in review, also evaluate your team.  Your team will be what makes your company successful.  Disruptions in your team can kill momentum.  Ensure you have the right people in the right seats on the bus.  It is a constant process, but make sure you’ve done the best you can to pick the right players for your team. Both elements work together for success.