How to Improve Your Profitability

I believe that better profitability is an overlooked tool for improving a business owner’s life. Higher profits allow people to send their kids to better schools, take better vacations, and save more for retirement. Profits also produce the cash needed to make better investments in the business and higher pay for the employees.

It’s nice to say that you are for more profits, but just how do you make that happen? I have found three major approaches to achieving higher profitability:

· Have a written business plan that is reviewed and updated regularly

· Invest in your pricing system

· Control your overhead costs through better processes

Writing a business plan forces you to do the critical thinking. Conflicting goals become more obvious. The reality that you don’t really understand your own strengths and weaknesses suddenly becomes clear. Addressing these problems in your planning is what makes it more likely that good decision making will result.

A typical business owner hates to have a prospect reject a quote and as a result we tend to leave a lot of money on the table. A good pricing system will allow you to constantly experiment with how you present the value of your service or product to get that higher sales dollar. Increasing your sales prices by just a few percentage points can often double your net profits.

It took me a lot of years to discover the key to controlling overhead costs. Controlling the processes that consume the overhead is the only thing that works. Rather than demanding that a company save money by buying fewer paperclips, change the processes so that fewer paperclips are required.

Controlling Subscriptions for Higher Profits

The latest great idea in business planning is the Subscription Model. One of the advantages is a steady revenue stream. Why is the model steadier? Because a monthly subscription means the customer has to make fewer buying decisions. Additionally, a monthly fee is significantly smaller than an annual or one-time acquisition cost. Great things for the seller, but not necessarily for us as buyers.

What’s the problem? We tend to keep paying for stuff that is no longer proving any value. The price is small, and it takes time to go to the vendor’s website and get off their automatic payment plan. It’s very easy to justify putting off doing something by thinking “I’ll give it one more month and see how I feel then.” This tendency to let these subscription payments can build up to something significant.

Here is what you can do to control these costs. It starts with a Master Control Subscriptions List which shows every on-going subscription that your business has. You can include the start date and when the next automatic renewal is set to happen. Whenever a new subscription is started, make sure that you add it to your list.

Each month reviews your subscriptions list. Make a column for assigning a value between 1 to 5. Next, sort by the last by the value amounts set a goal of dropping at least one subscription out of the low value subscriptions.

Subscription pricing models are going to continue to grow. Currently its mostly Internet based services providing this approach, but creative minds are already expanding it to big ticket items like automobiles. We need to begin developing cost controls to keep this stuff from getting out of hand.

What can a retailer do to reduce their inventory investment?

Glad you asked that question. The answer is IMPROVE YOUR PURCHASING PROCESS. How can that be you ask?

Let’s start with defining all the steps that happen whenever a retailer decides to replace their sold inventory.

1. Decision is made on what to order, how much and which vendor to get it from.

2. A Purchase Order is issued from the retailer’s accounting system and emailed, or someone goes to the vendors website and places the order.

3. Product comes in and the employees responsible for receiving move it off the truck and into a storage place.

4. The accountant’s must somehow be notified of what is received in order to schedule the vendor payment.

5. The actual payment is eventually made depending upon the terms.

This is the bare minimum of steps and for most retailers the process is typically more complex because it involves multiple departments and dispersed locations. This leads to a lot of telephone calls where the remote locations are calling the Purchasing Department asking, “did you get my order?” and “where is my stuff?”. All these activities have a cost which can be calculated and divided by the total number of PO’s issued to come down to a per PO cost.

Now here is the magic. If you can improve the efficiency of that process so that your cost per PO is reduced, you can afford to issue more PO’s for the same total cost. If you can order more often, then you can order in smaller quantities. Smaller quantity orders mean your inventory turns over more often in a year. If you inventory turns improve, the amount of cash invested in inventory naturally goes down and moves back to your bank account.

So how do you improve the Purchasing Process? Mostly it’s a question of software. Software to place orders, interface with your vendors, and make it easy for your employees to follow the transactions from beginning to end. A customized web-based software package is the key to making this process more efficient will usually pay for itself in less than a year.