Three Steps to Increase Profit

From The Vault

“To grow your profits, increase your speed.” ~ Phil Symchych

Three Steps to Increase Profit

Profit may not make the world go round, but it certainly keeps businesses around.

Profit, as you know, is what is left over after you pay your expenses. These include employees, suppliers, rent, direct product or service costs, and other indirect expenses such as overheads, marketing, selling, technology, and taxes.

Profit is an accounting concept. Cash flow is different than profit; it comes from profit once you’ve collected the incoming cash.

There are three key steps to increase profit in your business.

Before we discuss the three steps, there is one common weakness in many businesses. I blame the accountants (and I am one). Accountants are trained to minimize taxes, not to grow businesses. If you and your accountant are focused on minimizing taxes instead of growing your business, you will always stay small.

Stop Minimizing Taxes

If you’re not paying taxes, then you don’t have any profits, or you are creating unnecessary expenses, and that’s a bad thing in any business. Minimizing taxes actually hurts your ability to grow and reduces your business wealth.

That’s because bankers will lend you money against your retained earnings (or equity) on your balance sheet. When you minimize profit on your income statement, there’s no profit or earnings left to be retained, and you end up with a weak balance sheet and an under-capitalized business.

To increase profit, we need to maximize revenues, decrease expenses, and become more efficient.

Revenues are the fun part: attracting and serving customers, developing new offerings, and helping people. Expenses are our inputs of time, labour, materials, and all the resources required to help a customer. Not all expenses add value to your customer or your business.

The real opportunity to increase profits is efficiency. You can improve efficiency on both sides of the transaction, the revenue side and the expense side.

Revenue Efficiency to Drive Up Profits

To improve revenue efficiency, we can make our products and services more useful and more valuable for our customers. How, you ask? By seeing things from the customer’s perspective and by taking a proactive approach to increasing the value we provide.

Don’t wait for your customer to call you and place an order. Call them with some ideas on how you can help them in their business.

One of the most important lessons I’ve learned in business is that you can’t make it too easy or too much fun for your customers to do business with you.

Is it easy to do business with you? How long are customers ‘on hold’ before they speak with a human? How long to respond to an email inquiry?

Customer service activities are easily measurable and highly important for customer satisfaction and retention.

What new products, services, or ways of business have you developed? Has the pandemic ignited some creativity and innovation in your company, besides just working from home or virtual meetings?

Cost Efficiency to Increase Profit

Cost efficiency comes from eliminating wasteful activities or components incurred when creating your products or delivering your services.

Did you know that inventory is very expensive to keep around? It needs to be stored, counted, tracked, dusted off, moved around, and sorted through. The less inventory you can function with, the better for your profits.

Inventory is a huge drain on working capital and drives up overhead costs. Did you know if you have inventory more than one year old, it doesn’t really classify as a current asset on your balance sheet? How many times does all your inventory turnover every year?

Other cost inefficiencies come from complacency because “that’s how we’ve always done things,” and a lack of innovation or trying new things. How can you utilize technology, robotics, or automation to improve your efficiency?

The Ultimate Profit Efficiency: Speed

To measure efficiency, simply measure speed.

How long does it take, once a customer places an order, until the order is fulfilled, shipped, installed, and paid for? What is the length of your cycle from sales to production to payment?

• The sales metric is time from initial request to contract or sale.

• The operational metric is time, such as hours, days, or weeks, to create and deliver your product or service.

• The financial metric is total days to cash.

Once you start measuring speed in each of the areas of sales, production, and finance - and these are the key areas of your Flash report - you can figure out how to improve speed. Increasing speed will increase profit.

If you don’t get faster, someone else will. Just look at how Amazon makes it easy, fun, and quick to do business without having to leave your house, whether it’s thirty below or forty above Celsius with high humidity (for my Australian friends).

How can you Amazonize your own business?

What Happens to Profit When You Increase Speed

When you increase speed, you automatically increase the capacity of your business, without any additional capital expenditures.

Let’s say you’re a ten million in annual sales business, with a gross margin of 40%. If you increase speed by only 5%, you can generate an additional $500,000 of revenue and $200,000 of profit. This will also increase the valuation of your company by $1,000,000 to $1,400,000 assuming 5X to 7X earnings multiples.

That’s a pretty good return on investment for a few minor tweaks in your business.

A 5% increase in speed is easily achievable in most businesses. When you make minor improvements in sales, production, and cash flow, you will increase your overall speed…and your profits.

What are you measuring in your business?

Are you measuring the right things in your business? If you’re not measuring speed, you’re missing out on one of the most important factors to improve overall business performance.

Want a speed audit to assess your profit potential?

If you want a speed audit to assess your profit potential in your business, give me a call.

Full speed ahead!

Thanks for reading.