Deep down, behind just about every business is a simple desire…to make money. Profit, cash, bottom line – whatever you call it, is what the clear majority of business owners are seeking – yet the bulk of their focus is on sales or revenue growth. Now don’t get me wrong, sales are important for business, as it is technically impossible to make a profit without them…but…not all sales are profitable, and to push this a step further, established businesses are often the worst offenders. So, if you are sitting there smirking or scoffing at the thought, then let me challenge you.
When was the last time you costed out the delivery of your core products – to define your theoretical product margin?
If you are like the bulk of established business owners – the response is something like “a while ago”. In fact, if you are extremely truthful, it was possibly quite a while ago, and possibly – even before the business “was successful”.
Businesses are evolutionary. They start at a point, moving and growing in the direction of what feeds them. Typically, we know this as increased sales. As it evolves; more space, more people, different technology, better packaging, different suppliers, more debt, greater overhead, extra subscriptions, new clients, different markets etc…all take hold. The result, a larger business – sometimes a totally transformed business which is also, now making money – and in some cases – making very good money. This is
This is not however to say, that it is performing to its full potential. With a larger business and the comfort of profit, many established businesses lose the “expense edge” that they had when they were smaller. The acute understanding of where money is being spent, typically lessens with the larger volume of sales and the comfort of having some money in the bank. The awareness of inefficiency or problem processes also drops away, as more hands are now involved in the business process. So, the by-product of this evolution, is commonly a product which is no longer profitable. Changes to the operational process, its raw materials, its marketing or price point, have all eroded what may have been a strong margin – to one that is low or non-existent. Technology can also play a part in this, as the continued support for old technology can further erode margin. The solution to
The solution to this, is relatively simple. Some good business disciplines, can remove the shadows of doubt which may be hovering in your mind now. These disciplines include:
- Six monthly review of the cost base for your key products or product groups. You need to ensure that your margin assumptions are current – so adjust them as required.
- Separately, validate the assumptions on an annual basis. Track the progress of sales (or parcel of sales) to ensure that your assumptions are in fact reflective of your operational reality. Look closely at the labour areas, as these can blow out quickly. Exchange rates are another area that can be very volatile. In essence, you want to ensure that at a product level, you are making the margin you expected.
- At a strategic level – annually – consider the product to ensure that it still aligns with the chosen direction of the business – in its market. This step simply ensures that the “risk” side of the product gets some attention. It may allow you to avoid being stuck with an obsolete product or perhaps influence forward capital decisions.
With these disciplines in place, you will likely find instances in your business where you can simply choose, not to sell for a better profit performance. A good business, a sustainable business, a business which is predictably profitable – will have these disciplines in place.
Associated Best Practice Benchmarking Statements
BEST PRACTICE BENCHMARK: We understand the true costs of our products and/or services, which enables us to accurately review our return on completed sales each month. #Financial-Management
BEST PRACTICE BENCHMARK: We have a strategic business planning process which documents our goals, strategies and activities across the business for the coming 12 months and maps out our strategic direction for the next 3 - 5 years in line with our business purpose, brand promise and vision. #planning
BEST PRACTICE BENCHMARK: We have a rigorous business planning review process which ensures that progress towards business goals across all aspects of the business are reviewed against the business plan on an ongoing basis. #planning
About the SMART-Connect best practice business planning and strategy advisor
Business Consultant and Risk Advisor
Over the past 25+ years, Stewart Clark has worked with many business owners across a broad section of industries, in both small and large businesses. This work has included extensive business reviews from a financing/operational perspective, through strategy, succession, marketing, risk and more general business disciplines.
Experience has shown that it's not what you make that counts, it's how much you keep which really matters. Many businesses are not clear on these points, in that they are not in control of how much they are generating (revenue/marketing/sales), nor are they clear on what they actually keep (gross/net margins). Strong business disciplines address both of these areas.
Services provided to business include strategic planning, profit enhancement, succession planning and business structuring, marketing and sales performance, risk assessment and advisory.
There are a lot of consultants/coaches who talk the talk and help you plan your journey, but very few will develop the strategy, work with you through the trials of implementing change, and then still be around to see you celebrate your wins and achievements.