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Financial Strategies For The New Year

Jan 18, 2011

Many good firms are still struggling with the economy and are waiting things out. They have cut back costs as far as possible but are at a loss on how to increase sales and profits.  Here are seven steps you should be taking now to increase your sales and  profits in the new economy:

(1) Understand your real profitability drivers.
Do you really understand why you made (or lost) money last month?  Don’t automatically assume that it is all because of volume. It is may be a combination of things such as revenue levels, high fixed costs, unrecovered variable expenses, and some low and high margin customers and jobs.  If all you have to explain your profitability is a long listing of revenue and expense items, you don't really understand your profitability and can't take the necessary actions to drive improvement.  You must know your margins by individual product or service lines and customer, and understand the dynamics of your profit drivers.

(2) Re-calculate all of your overhead rates
Verify your hourly cost rates for production or service, direct, administrative, and overhead costs. In the past year, you have undoubtedly trimmed many costs and your other input costs have changed.  Lower costs mean lower overhead rates.  Lower base hours mean higher overhead rates.  If you haven't developed overhead rates to really understand the true cost of individual products or services, now is the time.  You might be surprised that you can actually sell at lower prices now and pick up sales volume that you are missing out on today.  Or, you could find that you are losing money with each sale because your costs have not come down in proportion to your production or service hours. If your vendor won't play ball, others certainly may. 

(3) Analyze your sales quoting model.
Does it include your new, lower overhead rates and purchase costs?  Does it show you your true cost of delivering your product or service?  Does it show you the true effect on your company of winning the business?  Your sales quoting model should break out the incremental costs and show you the cash affect and overhead coverage and profit impact of producing or servicing the quoted business.

(4) Lower Cost Structure.
Use your new lower cost structure and quoting model to develop pricing strategies to drive new sales, and to evaluate your current business. 

(5) Customers
Analyze your customers using the above tools and an 80/20 analysis.  You may find you can reduce more costs by ridding customers that use many resources but don't contribute much margin. 

(6) Action Plan
Develop detailed action plans to improve each of your main profitability drivers.  Assign an action oriented leader to head a team to analyze and improve each profitability driver and write down the specific goals, tasks, due dates and follow-up dates required to ensure each profitability driver is improved.  

(7) Key Performance Indicators
Set up a KPI (Key Performance Indicator) for each of your profitability drivers and chart its historical values versus its new target values. 

Remember that the coming new post recession economy will not be the same as the old pre recession economy. It is never the same. Just look at past recessions and recoveries if you are not convinced.  The time for waiting is over. You need to get going now.  If you don't have these tools in place, you may be at a competitive disadvantage and left behind when the new economy emerges. Don’t get left waiting at the alter.

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