The 1% Changes That Will Grow Your Business

Too often, business owners view growth of their business or bottom line as a major, complex challenge. Granted, there are some complexities involved, and some moving parts that must be managed to expand your business, but there is a simpler way to make a quicker, positive impact on your bottom line.

Make 1% changes.

Let’s take a look at how.

Our client is a manufacturing company that does $4M in revenue a year. Annual expenses run about $3.7M. So they’re netting $300K per year, or about an 8% profit margin. For any business I would think that an 8% margin would be a good thing. But the owner wants to expand and needs more available cash to do this. They do not want to take out a loan.

The company runs fairly efficiently but in reviewing their numbers there were many areas that they could do better in. Recall from Looking Within While Looking Without that the easiest part to control between revenue and expenses are – the expenses.

So we discussed this and I suggested a bite-sized course of action. What if we were to reduce our expenses by 1%? What impact would that be? We looked at all of the expenses and focused on the line items that we felt were the easiest to control. Among those were:

1. Utility costs.
2. Find lower cost materials without sacrificing quality.
3. Lower the unplanned downtime to manufacturing.
4. Labor costs – not in wage reductions but through stronger retention. Training a new hire takes investment in time and money. The more that employees can be retained means fewer that will need to be trained.

With expenses around $3.7M, a 1% reduction would bring expenses down to $3.663M, or a savings of $37K. To most businesses, saving $37K is a good thing.

Next, what we looked at was how a 1% increase in revenue could be made. The obvious answers were to look at the following avenues:

1. Small increase in prices.
2. Increase the number of customers.
3. Increase the rate of transactions per customer.
4. Increase the size of the average transaction.

A 1% increase in revenue would mean and increase from $4M to $4.04M, or an increase of $40K. Again, I cannot think of a business that would walk away from an additional $40K in revenue each year.

But these two 1% changes are not stand alone. They are cumulative. When revenue for our customer is increased by $40K, and expenses are reduced by $37K, we have a growth to the bottom line of $77K.

What that means is that our customer grows the bottom line from $300K to $377K, or a little over a 25% increase in their profit margin from making 1% changes. This is just in the first year.

Year two, all things being equal, would bring an additional $37K in expense reductions and an additional $80K in revenue. This is a net of $117K. Combine that with the $77K from year one and there will be $194K in net profits over two years.

Changes don’t have to be always have to be major to make an impact. 1% changes can make a positive impact too!

Contact us to see how The Cobalt Group can help you with this or any other business issues you are facing.

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