At a recent seminar I was conducting on “Organizing your business for maximum profit” I was asked by one of the participants what area of their business should be tackled first?
To summarize, my presentation was based on getting the participants to look at their businesses from a profitability aspect. Identify those areas that are generating the most profit/margin and where possible, get rid of those products or services that:
- take up too much of your time for the return
- don’t deliver high enough margin
- you can’t become a perceived expert
The rationale for this strategy is quite simple. Free up your company to focus on those products or services that actually deliver the highest return.
Although we’ve probably never analyzed them, most of us know instinctively what products/services that are not performing well. We’ve done everything we can think of to improve performance and nothing appears to be working. These products or services tend to consume your staffs time and effort and are commonly fraught with frustration, all the while distracting them from truly productive tasks. Deep down we know what needs to be done but for some reason, whether its pride or ego, we just can’t bring ourselves to pull the plug. This is what I call a pressure point.
So, where do you start? Ideally, you should be looking at all your products and services within your company, rank them by profitability and then do away with those that aren’t delivering the profit margin you need. However, like the seminar participant, most of us small business owners don’t always have the time to undertake a full analysis of our enterprises.
So I suggest you start by identifying the three pressure points in your business that are causing you the most frustration and analyze whether the margin is sufficiently high enough to warrant the stress. If not they become candidates for extinction. You can’t just guess at this, you actually need to sit down and do the calculations for the previous year. If you’ve never done this before, chances are you may be enlightened by what you find.
This exercise may be time consuming, but it’s not difficult. You need:
- Revenue generated for the previous 12 months for a given product or service
- All input costs required to deliver said product or service i.e. labour, materials, etc.
That’s about it unless you have extraordinary overhead costs such as dedicated warehouse or high sales acquisition costs, the direct input costs mentioned above are probably sufficient for most small businesses. Now calculate your margin!
What makes this such a compelling exercise is that it spells out in black and white exactly what is making you money. No more guessing. Where many business owners run into trouble is confusing revenue with profit. Chasing revenue for its own sake can be a recipe for disaster. In many cases high revenue opportunities tend to be very competitive and attract aggressive pricing by all participants. Additionally, these same projects tend to demand high inputs on your behalf in terms of manpower, materials or both and leave very little room for profit margin. Any mistakes or errors, however minor, can easily destroy your profit.
Focusing on your higher margin products and services can bring other benefits to you and your business, such as reduced overheads, staffing and stress.
When I performed this same analysis on my previous company and then focused only on our most profitable areas, our overall profitability increased even though our revenues shrunk.
Undertaking this exercise lets you separate fact from fiction, because at the end of the day- Revenue Without Profit is Pointless!
Copyright © Greg Weatherdon 2011
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