Beruflich Dokumente
Kultur Dokumente
Overview
There are four key areas that can help drive profitability. These are reducing costs, increasing
turnover, increasing productivity, and increasing efficiency.
You can also expand into new market sectors, or develop new products or services.
This guide explains how to assess your business' profitability, deliver growth for your bottom
line, and how to plan and manage change.
2. Manage your costs
Close management of your costs can drive your profitability. Most businesses can find some
wastage to reduce, it's important not to cut costs at the expense of the quality of your products
and services.
Have you looked at your key cost areas?
Your key cost areas to consider are:
Suppliers - are you getting the best deal from suppliers? Can you negotiate better terms or do
you need to change supplier? Can you drive better deals by consolidating your supplier base?
Can you buy on a 'just in time' basis to make more effective use of your working capital?
Finance - do you need to review your finance facilities? - are they at the most competitive
terms available? Are you using any loans and overdrafts effectively?
Premises - have you examined whether you are getting the most out of your space? Are there
more efficient ways to use your premises? Could you sublet some unused space?
Production - have you assessed whether you can cut waste and lower the costs of your
materials. Check whether you can adapt your production processes so they are more
streamlined, using fewer working hours or resources to cut labour costs.
Uncover real costs
Using activity-based costing is an effective way to find the real cost of specific business
activities. Activity-based costing shows you how much it costs you to carry out a specific
business function by attributing proportions of all your costs - such as salaries, premises or
raw materials - to specific activities.
The initial analysis may take a little time but using activity-based costing often shows up
costs (and therefore potential efficiencies) that you would not normally uncover using more
traditional costing methods.
You can usually put your customers and the products or services they buy into one of four
categories:
It makes sense to encourage customers that provide high sales and high profit. You can
also significantly boost your profitability by nurturing customers that provide high profit
on low sales.
If customers are providing low profit from high sales, you can maybe revise pricing to
generate more revenue from them. If customers are generating both low sales and low
profits, consider whether it's worth your while continuing to do business with them.
Find new 'best' customers
Make a judgment on expanding your customer base by finding new customers who have
a similar profile to your existing profitable customers.
If you are sure you have covered your existing market as much as you can, consider
moving into new markets.
My Business app is for all businesses in Scotland, whether you're established or thinking
about starting up.
Measure your operational efficiency on an ongoing basis. Put systems and processes in place
that will enable you to get the most from your resources.
For example, you could regularly monitor how many employee hours it takes to perform
specific tasks or provide services. If the time increases, it indicates inefficiency - the quicker
you eliminate this, the more your profitability will benefit.
The commitment to managing productivity must come from the top to be successful.
Communicate your productivity targets and measurements so staff feel they have something
to aim at.
You can also consider introducing staff incentives to keep to targets - but define them
carefully so quality is not adversely affected by increased speed of production.
Defining the key performance indicators (KPIs) that are most suitable for your business
would give you clear targets to aim for. They should reflect your goals, be measurable and
comparable and allow for corrective action to keep your targets on track.
Streamline your processes
Stepping back on a regular basis and questioning whether there are more efficient ways to
reach your goals is no bad thing. For example, you may always produce a particular type of
product at a specific time in the month. But would it ease your cashflow if you produced,
shipped and invoiced it earlier, or later, in the month?
It's useful to get an idea about how comparable businesses approach similar issues. This is
known as benchmarking. Benchmarking can be on a basic, like-for-like level - such as
comparing energy costs between similar businesses - or it can be more detailed, such as
sharing data and analysing production and stockholding patterns with other businesses you
trust.
The additional perspective that benchmarking offers can provide new ideas and momentum to
make your business more efficient.
When benchmarking, it is a good idea to focus on similar areas to the key performance
indicators (KPIs) you have already identified. Although there are no standard templates you
can use to benchmark your business, you could take the following steps:
Deciding on the areas of your business that you want to improve or compare to others. You
could do this through research techniques, such as informal conversations with customers,
employees, or suppliers, focus groups, or marketing research, quantitative research, surveys
and questionnaires.
Researching your business' processes and functions thoroughly and calculate how you will
measure potential improvement.
Finding industries that have similar processes you want to introduce - if you want to bring in
an integrated IT system, you should find other businesses that currently use these types of
system.
Locate the businesses that are profitable in the industries you are interested in benchmarking you can do this by consulting customers, suppliers, or trade associations.
Survey these companies for their measures and practices and identify business process
alternatives. If a business is reluctant to provide this information, you may get it through trade
associations or commercial market reports.
8. Checklist: improving the profitability of your business
Improving your business' profitability can help you to reduce costs, increase turnover and
productivity, and help you to plan for change and growth.
How you increase your business' profitability will depend on a number of factors - such as the
business sector you work in, the size of your business, or its operating costs. However, you
could review these options:
Locating areas in your business that could be improved or made more efficient - e.g.