Do you know where your profits come from? I don't just mean, what's left at the end of the month, but who, how and what drives the profitability of your business? It's a simple question, but according to a report I read from a well-known firm of accountants, half of businesses can't accurately determine their profitable customers and products. Now, that's a bit scary!
Turnover is vanity, profit is sanity, and of course, cash is reality. It all seems so obvious, but it never fails to surprise me how un-profit focused so many businesses are.
Clearly, it's not just about profits. It's all those other things that I've written and talked about over they years. About 'delighted' and 'devoted' customers, committed, motivated and effective people, thinking in 3D, being Dramatically and Demonstrably Different in the market place, creating a great place to work and having fun!
But all of this has to make economical sense. Profit is NOT a dirty word!
So, very quickly, here are a few key steps to maximising the profitability of your business:
1. What Gets Measured Gets Managed
Do you have profit targets? Are they shared and understood? Too many businesses see profit as what's left at the end. Profit focused businesses set profit targets and build upwards. They use these to drive the business, and everybody in it.
2. Choose 'Em Or Lose 'Em!
Work out which of your products and services actually make you money. Identify who your 'best' customers are. That doesn't necessarily mean those who spend lots of money; what about those that pay on time? Or those that pay at all?
It's also worth considering the issue of 'value for time'. How much time does it take to maintain the account or relationship? Is it 'cost effective'? Also consider the 'cost of acquisition' What are the costs in time and money to win these customers? Does it make commercial sense? Do you actually know?
You may even need to learn to say 'no' to some customers - not an easy thing to do I know, but nobody said this was going to be easy!
3. Involve Your People
Some years ago, a friend of mine who'd always worked for someone else asked if I was coming away for a weekend. I explained I couldn't afford it as I had no money. Indignantly, he replied: "No money? That's ridiculous! You run your own company – give yourself a pay rise!"
Most people don't know how business works. It's not their fault – nobody teaches them. In really profit focused businesses, people know the impact they have on profitability, both positively and negatively.
I'm not suggesting that they should be able to recite the cash flow backwards or have an MBA in global economics, but find ways to get them to understand the scale of your running costs, how many 'products' / 'services' you need to sell / deliver a month / week / day just to open the doors. Ask for ideas to reduce waste, increase efficiency and effectiveness, improve profitability. Reward those who do.
4. Get Proactive With Your Pricing
Not every customer focuses solely on price. Do you know which of your customers look at value, not just price? Establish a proactive pricing policy and ensure everyone knows what it is.
When was the last time your prices went up? Have your suppliers prices gone up and you've absorbed the difference? I know it's not easy to randomly increase all your prices, but are there certain products or services where opportunities exist? Are there some customers that should be paying more for what you provide?
Wherever possible, try to avoid discounting. Too many people fail to understand the financial implications of lowering prices in terms of the increased volumes needed to generate sufficient profits. Offering just a 5% discount on a 30% Gross Margin product means you have to sell 20% more volume at that new price just to maintain your margins – scary numbers!
So, wherever possible, please discount discounting. After all, anyone can give stuff away!
5. Maximise Opportunities
This is all about 'selling up' and 'selling on'. It means looking at your existing customers and identifying opportunities to do more business with them. Think 'share of customer', not just share of market.
In other words, are all your customers aware of your full range of products and services? Are there opportunities to 'sell on' additional ones? Similarly, are there additional 'extras'/ upgrades / 'better or bigger' offers that you could provide that customers are interested in? That's 'selling up'.
It is NOT about 'heavy selling' and forcing people to buy things they don't want! I bought a newspaper from a branch of a well known stationary shop chain at a station recently. The sales lady asked me if I wanted a huge bar of chocolate for a quid. I said 'no thank you' before she'd even got half way through what she was saying.
Why? Because I'd been asked the same question three times earlier in the day in other branches on my travels – each time with the same level of disinterest and lack of commitment. I'm all for encouraging customers to spend more, but not in that way.
Getting a 'profit focus' needs to be a key driver for many businesses, even more so in these tougher times. If you're interested in this stuff, and would like more, then visit my website www.andyhanselman.com for more info and details of my book 'Revolutionise the Profitability of Your Business' (That's called 'Selling On'!) Seriously, there's some free stuff up there too to help you further.
And finally, in the words of Henry Ford... "A business that makes nothing but money is a poor business." It's true – but you do need to make some.
Great article!
The problem as I see it is that most managers today seem to be more focused on doing business with their corporate structure than with their customers. This sickness takes four forms:
1. Incessant rounds of 'talk fests' loosely and incorrectly called meetings that are a total waste of productive time and usually more driven by personal or divisional pet projects than operational. 2. Ever increasing levels of reports that are created, particularly by support departments, that only have value to those departments from the point of view of trying to justify their existence. 3. All levels of management increasingly doing business with each other rather than the real source of success the customer. The power and the politics of trying to exist in an unhealthy corporate culture. 4. The perception by managers that they need to be constantly connected by mobile devices which creates a lack of responsibility for operations in reporting staff thus hampering their ability to learn to take decisions that help them grow in competence and/or get the job done... themselves.
Most the young managers I meet today seem to be constantly fire fighting rather than setting the direction and inspiring their team. Maybe its back to the leadership studies and forget the management books.
Ric www.orglearn.org
Thanks for that Richard. I think that you're right. Too many businesses allow (even 'encourage'?) the inward focus. I think a great question that is not asked enough is 'Does this 'add value' or 'add cost'? That question applies to meetings, 'initiatives', departments, even individuals. If it's not 'adding value', it's 'adding cost'. Ask the question of your managers and staff at the end of the day 'How have you 'added value' today?' Even better, why not ask yourself the question first? The answers are a bit scary sometimes!