We believe that profit engineering is designing your company to produce a predictable, pre-determined profit. I owned a service company in Vancouver Canada that produced a 45% gross margin every month, steadily, for 13 years. So it can be done. And if you have predictable margins you stand a better chance of making a profit.
Converting fixed costs to variable. This is a standard management consulting remedy. Fixed costs are rent, lease payments, debt payments and salaries. Variable costs are hourly wages, cost of supplies, transport and management wages. You only pay if you use them – and yes, Charlotte, management wages are variable! Companies with fixed income and variable costs do well – that is the cable TV model. Most companies have fixed costs and variable income and suffer.
Focus on best profit sectors. All companies have low, average and high margin products or services. Where we spend our effort is important. Ineffective sales staff will sell at the bottom of the ladder because they are selling on price alone, so your margins suffer. High value, high price products are harder to sell but are useful foil against which to sell a moderate price, good margin product. Don’t buy cheap, don’t buy expensive but buy in the middle and make me lots of margin.
Pricing for profit. There are dozens of ways to structure and position pricing to increase your profits. It is the most underrated tool in the businessman‘s toolbox. Far too many companies are not pricing their competitive advantage right and reaping the rewards. Instead, they believe that lowest price wins and after strangling themselves, go out of business. But, you can double profits in most companies in 30 days using some simple pricing concepts. Check out my book: Pricing Strategies for Small Business (2008).
Organisation of financial statements. Re-organising the financial statements can yield some interesting insights about where the sales emphasis and where the cost emphasis should be placed. There is no formula for this, so I will relate a story about a kitchen remodelling company which was losing money. Their model had a revenue line for the design, an add-on for the materials, and a margin on the installation costs. The better model we developed changed the add-on for materials supplied (Cabinets) to a sales commission from the cabinet manufacturer and left collection and holdbacks the responsibility of the manufacturer. It was simple change that built customer loyalty and protected the nature of the business – kitchen design – from the vicissitudes of the manufacturer supplier.
ROI. In 20 years of consulting work, I have seen too many companies blinded by the Delilah temptations of a juicy 10% add-on to a subcontractor price. But the buck and 100% of the liability stops with you. One error by someone who is not under your control and your profit for the quarter can be wiped out. Return on investment should really be the criterion for business every day. After all, when you considered founding or buying your business, the ultimate goal was to get a satisfactory return on the money you borrowed and the effort you put in.
If you are in business to make money and are struggling with your in-house efforts, call us today.