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Critical Factors for Improving Profitability

Critical Factors for Improving Profitability

A recent survey of our clients indicated that profit improvement was one of their top 3 priorities.  It is vital that business owners and managers understand the 2 drivers of profit, as well as the connection between profitability and cash flow.

Profitability is affected by sales and reducing costs. Within sales there are 3 critical areas: price, volume and customers. Each of these are connected and affect sales in different ways.

There are further ways to increase your profitability through fixed expenses, variable expenses and supplier management. Keep a look out for another blog that will be released over the next few weeks which covers this.

  1. Price

To improve profitability and performance, price sets the scene. It will determine the volume of sales and ultimately attract different types of customers.

The most obvious part of profitability is the selling price. It is essential when determining the price to ensure that the price and sales volume allow the business to be profitable. It is therefore, good practice to also review these prices regularly.

There are many factors that you need to consider when setting prices. For example, the balance of pricing across the product range. You may have a loss-leader (this is a product that makes little or no profit), which can be offset by other profitable products. Pricing should also consider the level of competition and relative pricing – reflecting the position you wish to take in your market segment.

When offering a discount to a customer, always remember that the discount will increase sales volume, but it will also eat into the profitability of the products. You should record all discounts and review them regularly.

There are two ways in which you can monitor pricing: profit margin and mark up. These can be linked through to your pricing strategy. Monitoring both will allow you to make sure they are both in line with the pricing strategy and make changes when necessary.

  • Always review your gross and net margins against previous periods
  • Understand customer profitability for each customer and their behaviours
  • Eliminate discounting if possible
  • Implement and review a mark-up policy – this will ensure that you are in line with the policy
  • Analyse sales on a regular basis.
  • Use key financial indicators to identify any anomalies that may impact the sales price:
    • Cost of goods sold margin
    • Gross margin
    • Average stock turnover
    • Mark-up
  1. Volume

There are two ways in which volume can be increase. The first is through increasing your current level of sales with your existing customers, and the other is sourcing new clients.

To increase sales to your current customers, you will need to implement a marketing strategy to entice more sales. Something that most businesses fail to see is the ability to up-sell to their existing customers. Making sure that all staff are trained in this area could be most beneficial for your business.

Selling targets are a way to monitor overall performance and enhance profitability. Therefore, I advise you to look at this carefully as it can have an impact on other areas of the business. Understanding your break-even point will allow for realistic targets to be set and ensure profit is maximised.

To help increase the volume:

  • Understand the current customer buying patterns
  • Implement a marketing strategy to increase sales volumes
  • Introduce loyalty programs that encourage referrals
  • Train staff to up sell and make sure they are aware of the high-profit products.
  • Use break-even calculations to set sales targets
  • Always research to see if there are other markets that the business can move into.
  1. Customers

First and foremost, excellent customer service is imperative to keeping and winning new customers. Understanding their needs and wants is a simple step in improving the performance of the business.

Having a Customer Relationship Management system will enable you to keep a wide range of information about your customer and their behaviours. If the business needs to increase the selling power, utilising this tool is the first step.

  • Understand the needs of the business customer and use this information to improve the customer service experience.
  • Measure customer service levels, for example, there are many free tools such as Survey Monkey to gain these insights
  • Reward current customer for their loyalty
  • Consider using mystery shoppers to monitor customer service
  • Have regular contact with your customers to make sure your business is front of mind.

In conclusion, each business has their own challenges when it comes to profitability, and this blog only touches on the surface of what can be achieved. If you have found this article valuable in understanding profitability and would like to learn more, then please reach out to us.

The CFO Centre has over 40 CFOs across Australia and NZ and over 1000 across the globe.  Our track record shows our ability to help our clients improve their profit.  If you want to book a 15 minute call with us to find out more, feel free to get in touch via 1300 447 740 or email us at [email protected] 

Tips for the Manufacturing Sector

Tips for the Manufacturing Sector

Manufacturing Tips – Let’s take a step back….and go back to basics: Production Scheduling!

The last 12-18 odd months has been a time for many people to self-reflect. So why not apply this logic to your business?

We are often creatures of habit and do many tasks out of routine, but do not look behind the curtain.

There are literally dozens of articles on the internet and in business magazines on manufacturing financial tips, or top tips  to improve your business fast. Everyone starts throwing out the buzz words like: cash flow; inventory management; procurement savings; marketing and e-commerce and better working capital management, the lists goes on.

For most business owners, your eyes have already started to glaze over. Or, you’ve just clicked the close button on the internet browser. I did on several of the online articles I googled!

In other words, in my experience, you need to take a few steps back and go back to basics.

Look behind the curtain and optimise your production schedule.

Step 1.

Identify the key product (Group A) that your business manufactures and sells. What do you want the market to know you as? What is the goal? Is it to increase the productivity of product X and increase sales by X percent?

Step 2.

Secondly, you can consider looking at the other products (Group B, C, D etc) that your business manufactures and sells. What is the goal with these products? Ask the questions for this step that you asked in step 1 for your key product.

Step 3.

Thirdly, analyse the volumes of these product lines and determine what your realistic manufacturing capabilities are (with and without overtime, additional shifts, equipment change overs if required, etc). Do the calculations! If you are not sure how to do the analysis, get some outside talent to assist on a short-term basis.

Step 4.

As a next step, develop the production schedule. With Group A as your primary production, you can factor in peak sales periods and additionally, in “quieter times”, you can manufacture the other products (Group B, C, D etc). Remember to factor in equipment change overs and maintenance requirements, and consider warehousing constraints for raw materials and storing of finished goods.

Graphical Example of Production Schedule:

Step 5.

Setting the production schedule flows to your procurement requirements and timing and as a result, this then follows onto your inventory management. These two areas are driven by your production schedule (not the other way around!).

Golden rule:  Do not change the schedule!!! You may need to tweak and adjust for the unexpected, however, chopping and changing the schedule can cause productivity losses and create instability in the organisation.

Step 6.

To manage the manufacturing process from end to end, you need timely reporting and metrics to track the performance.  After that, review the reports regularly – some might be hourly, daily, every 2-3 days, weekly or monthly (just depends on your operations).

If your current software system cannot meet the reporting requirement, develop reports that meet your business needs. If you do not have resources internally to develop the reporting, get short-term outside talent.

Longer term, you may need to look at upgrading your software system that grows with your business needs. Think strategically!

Step 7.

Lastly, communicate the production schedule to your organisation. Set the expectations, from the team members on the production floor through to finance, customer service and sales. You’ll find over time that the salespeople that understand the production schedule and work with it, tend to be more successful in sales and meet customer expectations.

Once you are in the rhythm of the production schedule you can work on cost and waste reduction programs. For instance, refining your inventory management, supplier reviews, productivity efficiencies and so on.

In conclusion, go back to basics, break it down into steps and do not be afraid to ask for help.

By Melissa Tirant, Chief Financial Officer, Victoria – The CFO Centre