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:
- Utility costs.
- Find lower cost materials without sacrificing quality.
- Lower the unplanned downtime to manufacturing.
- 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:
- Small increase in prices.
- Increase the number of customers.
- Increase the rate of transactions per customer.
- 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.
We want to hear what you think. Leave a comment and let’s start a
discussion.
