Case Study - Increasing Profitability
Increasing Profitability – why it's best to step back and take a holistic view of what you could do
‘Sales are vanity, profits are prosperity’
Increasing profitability is the eternal challenge – but how do you do it?
There are two obvious solutions to increasing profitability – increasing sales and cutting costs. Let’s examine each one in turn.
1. Increase sales
This might seem an obvious solution, but increased sales do not automatically mean increased profits. Each extra sale carries its own cost in terms of materials, transport, energy, packaging, and employee wages. Plus, if it were that easy to increase your sales, you’d have done it already – right?
Some companies increase their sales by cutting their prices. Unit sales increase but profits decrease. In practice, if you try this, your competitors are likely to drop their prices in response - a tactic which usually starts a ‘race to the bottom’ on pricing, where you and your competitors are likely to at best be significantly less profitable than before. Only your customers benefit from this approach and ultimately this tactic is unsustainable.
From a profit and loss account viewpoint, it takes a huge number of additional sales to make a significant difference in your profits.
So if increasing sales isn’t a good option, your next option is:
2. Cutting Costs
You have more control over your costs, and a relatively small reduction in costs will directly improve your profits. To cut costs effectively, you need to look for efficiencies in what you already do. To do this:
- Understand what your teams currently do, and how what they do contributes to either increasing sales or delivering what’s needed. In particular, is there ‘overhead’ work that doesn’t actually benefit anyone internally or externally? If there is, and you’re sure that it doesn’t benefit anyone, then it’s time to get rid of it.
- Assess how many materials are wasted through inefficient manufacturing, storage or stock management processes? [link to waste article]
- Ask your workforce – they will know exactly where time, money or effort is being wasted and how it could be improved. Instituting an effective suggestions and reward scheme can be a great help in doing this – but note the ‘effective’ adjective: staff only receive a reward if their suggestions are practical and result in increased profitability.
- If you have key suppliers, it is worth investigating how well you currently work together and how that could be improved for mutual benefit. For example, if you currently receive materials daily, could that change to twice weekly, cutting transport costs for both parties?
- Alternatively, when buying new products, instead of telling your suppliers what you want them to do, consider giving them your overall requirements and ask them to propose how they would fulfil them. Their solution might be considerably cheaper and faster than your own.
- When considering how to cut waste or streamline processes, assess how easily these can be implemented and how big a difference each potential option could make. Some options may be dependent on others – draw up a flow chart, asking, “If we do this, what else has to happen?” in order to assess the true scale of the changes that are required. Remember to cost each change and establish the benefit of each – change for the sake of it rarely leads to increased profitability.
Having considered how to increase sales and cut costs, it’s time to consider a longer-term, holistic approach.
3. Longer-term approaches
These can be done in parallel with improving efficiencies. The purpose of a longer-term plan is to understand who all your potential customers really are, what they truly value, how close you are today to providing that at a profitable price, and what you have to do to close that gap.
You may find that something you already do is highly valued by customers and that they would be willing to pay for extra for it. For example, if you design bespoke robotics and include training in how to use and maintain robotic systems, your customers might value the training highly and be willing to pay a premium for it.
Alternatively, your customers might currently be shopping elsewhere for a product or service that you could easily provide yourself as part of an end to end package.
Explore if what you currently provide to your existing customers is valuable to a wider set of customers. Think widely and explore options that are not necessarily obvious at first sight.
I’ve worked with a variety of organisations ranging from FTSE-100 companies to small businesses on increasing their profitability. In each case, I started with the questions above:
- Can we increase sales?
- Can we decrease costs?
- What can we do longer term?
The answers naturally differed significantly because of their particular circumstances, but the results included:
- Doubling sales within 5 years, with a corresponding increase in profit.
- A decrease in costs of 4% from improving business efficiency resulted in a 40% increase in profit margins.
- Reducing the development time and costs of a complex product by more than 40% by setting up and running a ‘virtual team’ relationship with the company’s key suppliers.
- A business working in a highly regulated environment, where specialisation meant there was a limited customer base, identified and won 3 new customers.