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Success Strategies: Don't Chase Sales-Chase Profits

September 1, 2005
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Ever heard the saying, "A penny saved is a penny earned?" While that might be true in your personal finances, a penny saved in business can be like earning 20 pennies. For example, let's say you have $10 million in annual sales with earnings of 5%, or $500,000. Your goal for the next 12 months is to increase your earnings by $100,000, for a total of $600,000.

Many CEOs would try to get $2 million more in sales, of which 5% would fall to the bottom line. But how fast can you get $2 million in additional sales in today's tough economic times? I have a solution that is 20 times faster-eliminate the costly mistakes and bottlenecks that surely exist in your company, and improve your management skills. Following are some areas to look at and deal with in your organization.

Focus on Operations

Every business includes three primary elements:
  • sales (includes marketing)-brings business
  • finance-collects monies and pays bills
  • operations-creates the product or service

Companies can get help with sales through marketing experts, sales and marketing education, books, and audio programs. Similarly, finance has CPAs and other financial experts, as well as a plethora of educational opportunities. Unfortunately, while the operations portion of the business (both personnel and processes) represents the highest cost (70-80% for most businesses), not much help is available. We don't have enough operations management educational opportunities or trained consultants available in this country. The lowering of variable costs such as labor, materials, etc. for operations should be a primary focus; unfortunately, most small- to mid-sized businesses focus on increasing sales instead.

Quality is Paramount

The quality of your product or service (your operations) is the key item that drives long-term sales. Your quality defines your customers' loyalty and determines your long-term costs (repairs, waste and warranty support are expensive). A manager should be consumed by this factor of his or her job-improving processes. If you are not constantly improving, you will be left behind. Your competition probably has a quality improvement system in place or will have one soon.

Proper Reporting

In small- and mid-size businesses, operational managers often concentrate on the final bottom line rather than on operations reporting. Most reporting is the standard monthly profit-and-loss type, which is good for your banker, but not for your managers. The information is often weeks or months behind-even if it is "on-time," since the finance department or CPA must compile the month and close it out. Therefore, the information for the first week of the month gets to the managers at least six weeks after it is needed. Proper reporting that is timely, accurate and meaningful should be implemented. This information may be financial, operational or statistical in nature.

Control Inventories

Inventory control is an area that many American businesses seem to have trouble understanding properly. All inventories, whether raw materials, work-in-process or finished goods, have one thing in common-carrying costs. A carrying cost is the cost to your business of having the privilege of storing the material, and it is much more expensive than most realize.

The carrying costs of most businesses are 25-40% of inventory on a yearly basis. These costs include items like facility cost, insurance, handling, pilferage, breakage, obsolescence, depreciation, taxes and opportunity costs. You could have that money doing something else-even in the bank as "working capital" it would be available and earning interest.

This is why larger businesses go to just-in-time inventory operations. Imagine ordering three months of extra raw goods inventory because the vendor offered you a 3% discount-you just lost money, and this happens in businesses every day.

Standard Operating Procedures

Every business that has grown and become successful on a large scale has moved to using standard operating procedures, i.e., every operation is written down and followed during everyday operations. When a business is small, you might think you can get away with "seat-of-your-pants" management, where everybody does his or her best. Unfortunately, people's best is not enough-efforts must be directed in a productive manner. To do this consistently, written procedures must be created and followed. If done in conjunction with your continuous process improvement effort, it is a sure recipe for success.

Quote with Care

A common problem with midsize businesses is the disconnect between the quoting process and the real operations costs. Remember to include an overhead that reflects reality (have you actually calculated your overhead based on last month's financials?), include shipping costs, and don't forget labor that is often overlooked (such as the shipping department, clean-up time and design efforts).

After determining the actual costs, put in the appropriate profit margin-that is why you are in business, don't forget it. Finally, after the delivery, report on the final cost of the job and compare it to the quote. This is guaranteed to create a ripe ground for improvement in the company's processes.

Pass up Business

What?! Pass up business?! Absolutely. If you cannot sell at your reasonable and accurate quote, then don't sell. It is a certain loss of profit. If you cannot get enough sales at your quotes, then you need to be either lowering your costs to bring quotes in line with the market, or addressing marketing solutions to build market share. Never subsidize the market with your own equity.

Train Seriously

Train your managers, and have your managers train their people. Many managers are promoted to management because they were good at their previous job, or because they are "likeable."

Management is a learned skill; if you don't provide management training, you are setting your managers up for failure. Proper training creates higher productivity and lower turnover throughout the entire company.

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