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.
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