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Tag: business owners

Critical Factors for Improving Profitability

by lauramills
Critical Factors for Improving Profitability

In a recent survey of our clients, improving profitability emerged as one of the top three priorities on their business agenda. Profitability is the lifeblood of any successful enterprise, and understanding its intricacies is crucial for business owners and managers alike. In this blog, we’ll dive into the two primary drivers of profit and explore the indispensable link between profitability and cash flow.

Profitability is affected by sales and reducing costs. Within the realms of sales there are 3 critical areas: price, volume and customers. These elements are not isolated but intricately interconnected, each influencing sales in unique ways.

  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.

Setting prices involves a careful balance across your product range. It’s common to have “loss-leader” products, which may not yield substantial profits but can be offset by other lucrative offerings. Competitive pricing and your desired market positioning should also guide your pricing strategy. Discounts can boost sales volume but may impact profitability, so diligent record-keeping and regular review are key.

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.

Two valuable metrics for monitoring pricing effectiveness are profit margin and mark-up. Both metrics should be in sync with your pricing strategy, allowing you to make necessary adjustments.

  • Always review your gross and net margins against previous periods
  • Understand customer profitability and their behaviours
  • Minimise discounting if possible
  • Implement and review a mark-up 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 boost sales with existing customers, implement a comprehensive marketing strategy and capitalise on the often-overlooked opportunity of up-selling. Effective sales targets and an understanding of your break-even point are essential to drive performance.

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 your customers’ buying patterns
  • Implement a marketing strategy to increase sales volumes
  • Introduce loyalty programs that encourage referrals
  • Train staff to excel in upselling high-profit products.
  • Use break-even calculations to set achievable sales targets
  • Explore opportunities to expand into new markets

  1. Customers

Exceptional customer service is the cornerstone of customer retention and acquisition. Understanding your customers’ needs and preferences is a simple yet powerful step towards business improvement. Utilising a Customer Relationship Management (CRM) system can provide invaluable insights into customer behaviour.

  • Understand the needs of the business customer and use this information to improve the customer service experience.
  • Utilise tools like Survey Monkey to measure customer service levels.
  • Reward current customer for their loyal support
  • Consider using mystery shoppers to monitor customer service
  • Maintain regular contact with customers to stay top of mind

In conclusion, the pursuit of profitability is a nuanced journey, and this blog only scratches the surface of what’s achievable.

At The CFO Centre, we boast a team of over 45 experienced CFOs across Australia and New Zealand, and over 1000 globally. Our track record speaks volumes about our ability to help clients boost their profits. If you’re interested in learning more, feel free to contacting us at 1300 447 740. Your success is our priority, and we’re here to help you on your journey to greater profitability.

You can also get in contact with us here.

First published on 22nd Feb ’22
Updated on 15th Jan ’24

Tips for the Manufacturing Sector

by lauramills
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