Five routes to greater profitability.[check] This checklist identifies five routes which are frequently taken in pursuit of greater profitability. Many businessmen and managers are familiar with them under a variety of labels, but too many fail to recognise the interrelationships between them. A change in any one of them has a potential impact on the others--a fact often ignored, to the detriment Any loss or harm to a person or property; relinquishment of a legal right, benefit, or something of value. Detriment is most frequently applied to contract formation, since it is an essential element of consideration, which is a prerequisite of a legally enforceable contract. of the business. Definition There are five basic ways in which a firm can have a direct effect on its profitability. These are:</p> <pre> Increasing sales volume reducing costs and/or ensuring that costs are fully recovered where this has not previously been the case improving product-mix (varying the relationships between the volumes of individual products or groups of products sold) raising prices selectively or as a whole reducing the capital employed Capital Employed 1. The total amount of capital used for the acquisition of profits. 2. The value of all the assets employed in a business. 3. Fixed assets plus working capital. 4. Total assets less current liabilities. in the business. </pre> <p>A change in any one of these will impact on the others. Any change, made or planned, whether voluntary or involuntary involuntary adj. or adv. without intent, will, or choice. Participation in a crime is involuntary if forced by immediate threat to life or health of oneself or one's loved ones, and will result in dismissal or acquittal. INVOLUNTARY. , must therefore be considered in the context of all the others; changes made in isolation may not have the expected impact on profitability. Other management strategies, such as total quality management and customer service programmes, can also influence profitability by cutting out unneeded processes for example, or motivating staff to greater output. Advantages of recognising the interrelationships of the five strategic factors * Financial planning Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against will take all five factors and their interrelationships into account. * The impact on profitability of changes can be assessed systematically. * The risks associated with changes can be viewed more realistically. * The line between risk taking and recklessness Rashness; heedlessness; wanton conduct. The state of mind accompanying an act that either pays no regard to its probably or possibly injurious consequences, or which, though foreseeing such consequences, persists in spite of such knowledge. may be clearer. Action checklist 1. Carry out a market analysis Take a close look at current and potential markets, using focus groups, customer feedback and commercial and commissioned market research. Bear in mind that in certain product and service areas, technological innovations can change or impact significantly on market structures and loyalty very quickly. Market analysis, therefore, has to be targeted to give rapid results. This research should reveal whether your current markets can continue and new markets to penetrate. 2. Consider increasing your sales volume Increasing sales volume may appear to be an easy way of increasing the profitability of your organisation, but this is not necessarily the case. There are certain points that must be recognised. * Selling more and more is not the key to increased profitability: profit requires turnover, but turnover does not equal profit. Remember that "turnover is vanity Vanity See also Conceit, Egotism. Barnabas, Parson conceited and weak clergyman. [Br. Lit.: Joseph Andrews] Bottom, Nick self-important weaver. : profit is sanity Reasonable understanding; sound mind; possessing mental faculties that are capable of distinguishing right from wrong so as to bear legal responsibility for one's actions. SANITY, med. jur. The state of a person who has a sound understanding; the reverse of insanity. ". * If you increase your sales volume, you must simultaneously rigorously control costs, prices, capital employed and your product/service mix. Be sure that none of the latter components of your potential profitability increase disproportionately dis·pro·por·tion·ate adj. Out of proportion, as in size, shape, or amount. dis  pro·por . If they do,
increased sales will lead to reduced rather than increased profit.
* Seeking to increase your sales turnover by employing an additional representative or trading in a bigger geographical area will only produce more profit if extra sales produce at least enough extra profit (not revenue) to cover the extra costs. * If prices and margins are reduced to generate more sales, a considerable increase in sales will be necessary, otherwise total revenue will fall while costs remain the same. * Increases in small volume orders may hinder hin·der 1 v. hin·dered, hin·der·ing, hin·ders v.tr. 1. To be or get in the way of. 2. To obstruct or delay the progress of. v.intr. profitability rather than boost it due to the inherent order administration costs, such as invoicing and dispatching. * If credit is extended in order to encourage more sales your organisation will have to bear the costs of this--with a knock-on effect knock-on effect Noun the indirect result of an action or decision Noun 1. knock-on effect - a secondary or incidental effect Britain, Great Britain, U.K. on profitability. * Selling more of all your product/service lines and/or introducing new ones may increase your sales volume, but be sure you know the contribution that each product/service line makes. Selling more of loss-making lines is bad business unless it is necessary in order to raise sales of profit-making ones. * In some circumstances greater profits may be achieved if turnover is reduced. Surveys have shown that a wholly disproportionate dis·pro·por·tion·ate adj. Out of proportion, as in size, shape, or amount. dis pro·por amount of
cost and effort can be invested to achieve a small amount of turnover
and sales revenue. It is not uncommon to find that 50% of deliveries
made account for only 15% of sales revenue. Consider what would happen
if you reduced your sales by a selective 10%.
3. Look at the possibility of reducing your costs Investigate and establish your true costs in total and for unit sales unit sales Sales measured in terms of physical units rather than dollars. Unit sales data are often used by financial analysts when evaluating the health of a company. . You cannot adjust your costs in relation to other parts of your business unless you know what they are. Consider the effects of specific cost reductions carefully--arbitrary reductions may not produce the desired results in the long term. Seek advice from your accountant (internal), your auditors, and your bank manager. 4. Analyse an·a·lyse v. Chiefly British Variant of analyze. analyse or US -lyze Verb [-lysing, -lysed] or -lyzing, and improve your product/service mix Product/service mix reflects the combinations in which the products/services you provide are sold. The mix is normally derived from a series of historical accidents rather than from careful planning and analysis and consequently may not be the most profitable for your organisation. Examine the products sold by your organisation in terms of the costs attributable to each and the net margin each makes. You may find that those products which produce the highest unit gross profit and which make the highest percentage contribution to your volume of sales also attract a disproportionate amount of your selling costs. You may find, for example, that you should aim to sell more of A and B which you have found to be profitable, to supply less of C and D which are of limited profitability and to eliminate E and F from your sales portfolio as they are loss makers. Consider the impact this will have on other factors--for example a well-founded change in the product/service mix may lead to a reduced volume of sales but increased profitability. 5. Examine your selling prices and profit margins Raising selling prices is a potential route to increased profitability (or at least to maintaining current levels of profitability when they may otherwise fall), but there are of course pitfalls. Although price increases may be accepted if they are part of a general adjustment of prices in your business sector (in which case your overall level of profitability is likely to be merely maintained), to raise prices in isolation without losing business (and thereby risking reduced profits) requires either a near monopoly situation, a vast difference between your products and those of your competitors, or a carefully thought-out (and enacted) policy and sales strategy. 6. Look at the capital employed in your business Obtaining good returns on capital and reducing the capital tied up in your business normally lead to improved profitability. Identify the categories of capital employed in your business and consider whether the following can apply to these categories: * introducing tighter control of credit * reducing stock levels * introducing outsourcing (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management. (or expanding its scope) * disposing of redundant buildings (or even locating to a new site where better terms of lease may be available) * maximising the benefits of exploiting ICT (1) (Information and Communications Technology) An umbrella term for the information technology field. See IT. (2) (International Computers and Tabulators) See ICL. 1. (testing) ICT - In Circuit Test. (information and telecommunications Communicating information, including data, text, pictures, voice and video over long distance. See communications. technologies). Make sure you take professional advice. 7. Remember balance A healthy business in a competitive environment is always changing, and as demonstrated here, this is particularly relevant to the five components of profitability and their interrelationships. Change, particularly in the area of aiming to improve profitability, always requires compromise, and your aim must be to achieve the best balance possible between sales volume, costs, margins, product-mix and capital employed--the ideal balance is often impossible, and this year's optimum may not be next year's. Dos and don'ts for increasing profitability Do Identify which of the five categories any proposed change falls into. Carefully consider the impact of change on all categories. Consider longer term impacts on the capacity of business to survive as well as on its profitability. Don't Ignore the 'bad news' which may emerge from analysis when it threatens the achievement of a pet ambition, such as expansion into other lines or into another country. Ignore changes which may be imposed on your business, by the bank manager or legislation for example. Useful reading Winning the profit game: smarter pricing and smarter branding, Robert G Docters and others New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of NY: McGrawHill, 2004 From cost to performance management: a blueprint blueprint, white-on-blue photographic print, commonly of a working drawing used during building or manufacturing. The plan is first drawn to scale on a special paper or tracing cloth through which light can penetrate. for organisational development Catherine Stenzel and Joe Stenzel Hoboken NJ: John Wiley John Wiley may refer to:
Marketing ROI Marketing ROI is a related term to Return on Marketing Investment (ROMI) and is a measure of the effectiveness (see also marketing effectiveness) of various marketing activities. : the path to campaign, customer and corporate profitability, James D Lenskold Achieving business alchemy alchemy (ăl`kəmē), ancient art of obscure origin that sought to transform base metals (e.g., lead) into silver and gold; forerunner of the science of chemistry. in a week, Robert Ashton London: Hodder and Stoughton, 2002 The cost management toolbox See toolkit and toolbar. : a manager's guide to controlling costs and boosting profits, Lianabel Oliver New York: AMACOM AMACOM American Management Association , 2000 Thought starters * Have you sometimes ignored the interrelationships in the past? What happened? * The first priority in any business must be survival. Do proposed changes threaten the survival of your business? * Is a proposed change based on necessity, opportunity or vanity? |
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