Profit Improvement Process
Posted on March 31, 2020 by Terry Eve
When our firm was updating the services we provide, I was asked to author the area of profit Improvement. I am going to publish elements of that discussion over the next few weeks. Profit improvement requires a comprehensive analysis of the income statement starting with revenues, understanding and reducing the cost of producing those revenues and the analysis and reduction of general and administrative expenses. The first area we will look at is revenues. Next we will look at the cost of producing revenue and finally General & Administrative expenses.
Profit Improvement is frequently not as difficult as it may seem, provided management is committed to the goal. In essence profit improvement occurs when revenues are increased, costs are decreased, or preferably both.
So what is the Profit Improvement process? It is a line by line analysis of your profit and loss statement that looks at each component to identify opportunities to increase revenues or reduce costs. It also means benchmarking against other similar businesses and creating a planned budget to identify variances for corrective action going forward.
The first step in the profit improvement process is to look at revenues. Revenue Improvements come from several areas.
- 1. How is your customer retention? The cost of obtaining a new customer is significantly greater than the cost of maintaining an existing customer. Loss of customers means loss of repeat business, which in turn means lost potential for more revenue.
- 2. How are your margins? Looking at profit margins can reveal a number of issues.
- a. Are products and services properly priced?
- b. Does labor contain wasted time?
- c. Are profit margins improving or declining over time and why?.
- d. Can prices be increased? If not, how can costs be decreased in order to maintain the margins needed to maintain a healthy company?
- e. Can the cost of products be renegotiated with suppliers? Frequently a business has grown to the point that it may be entitled to better prices from suppliers, but they don’t ask to renegotiate pricing.
- f. Can labor productivity be improved to constrain labor costs in the delivery of products & services?
- g. What is your product mix? Frequently various products and services are priced differently and yield different margins. A shift in the mix of these products can have a significant impact on the overall company-wide profit margin.
- h. Is your business model a low volume high margin model or low margin high volume model?
- 3. What is the impact of a price increase? Sometimes a price increase is avoided because of the fear of lost business. Other companies aggressively price and recognized that a few lost sales in return for more profitable overall sales is an acceptable trade off. Can you identify the effect of increased prices on the demand for your product or services?
- 4. Frequently, price is not the issue, the value proposition is! Is your value proposition clear to the purchaser of your goods and services so they can differentiate between your company and your competitors?