No matter whether you’re envisioning a startup or been in business for decades, you want to increase profits. And, if you can increase profits without a lot of expense or making massive changes to your operations, so much the better. The key is making wise investments in your future and being willing to adapt your strategies when a new, promising alternative shows promise without leading your business into constant turmoil by chasing every new fade. And, that’s a tall order.
You might think only technology businesses have good opportunities to make more money or only those in high-growth industries. That’s simply not the case and, often, we find businesses in rather mundane industries face the greatest potential to improve their bottom line by pivoting or bringing their operation up to modern standards. So, whether your business is a sporting goods store, or you’re a tradesman offering old-line products such as a reciprocating air compressor supplier, we offer 5 simple suggestions to improve your business without breaking the bank.
Before we start, let’s take a moment to think about profits and how you improve them.
Profits result from the simple equation:
Thus, you improve profitability when you either increase sales or reduce costs. Unfortunately, firms often have a knee jerk reaction to tough times by only dealing with one element of this equation, their costs. Tom Peters, the author of In Search of Excellence, is created by saying:
You can’t shrink your way to greatness
And, over the years since publication, experts failed to follow his edict that controlling costs isn’t the way to create a great company. Sure, you can’t have waste if you want to succeed but neither can you build your strategy entirely on the cheapest option.
You can’t make a silk purse out of a sow’s ear
Maybe an analogy makes this clear. Imagine you invite your boss to dinner hoping to improve your relationship and prove to her you should have more responsibility. Do you go out and buy the cheapest hamburger at the grocery store (you know, the stuff discounted because it reached its expiration date) or do you choose a nice filet for your outdoor BBQ? Of course, you choose a meal designed to impress because you know the investment is worth it.
The same is true in business. You can’t make a high-quality product with poor-quality raw materials and if you fail to spend on research and development, you continue selling the same old products and, eventually, market tastes move beyond your old products.
Early in my career, I was interested in multi-generational businesses. Some survived for generations while others failed when passed to the new generation. I wanted to know why, so I compared some US businesses that were in their 2nd or 3rd generation with some in Spain because that country boasts businesses now enjoying their 5th or 6th generation since their founding (Spain was also a great choice because they have a government agency to work with these businesses, thus giving me a source).
Many businesses faced declining profits even in the second generation, while I found a 5th generation business thriving. The difference? Successful businesses evolved over time because they took a long-term view of profits rather than attempting to maximize short-term profitability.
4 Ways to increase profits
It sounds silly but so many companies don’t track their finances closely enough, resulting in wasteful spending. For instance, one of the multi-generational businesses I researched had no idea how much each product in their inventory cost to make, hence they didn’t know if they were making money or losing money on the products they sold. It makes no sense to sell a million units if you lose $.20 on each unit.
Activity-based costing (ABC) is an advanced accounting strategy for capturing costs along the manufacturing process then assigning those costs to individual product lines so you know exactly how much each product costs to make. Other tools also help reduce waste including:
- JIT (just in time) reduce inventory carrying costs, such as warehouse space
- Preventative maintenance to extend the life of your equipment
- Reuse waste material by recycling or creating new products from them. For instance, hops used in fermenting beer is sold to cattle farmers as feed.
- Reduce packing material
- Monitor accounts receivable to improve collections
- Quality control based on TQM that monitors manufacturing and stops the process when you detect a variance before manufacturing 1000s of products that fail inspection.
- And, many more
Invest in training
Investing in your staff not only shows you care about them, which improves performance but brings new skills to bear within the operation. A key element of the strategies employed by Ralph Stayer of Johnsonville Sausage to improve profits involved eliminating pay increases in favor of pay increases based on learning a new skill. Thus, learning to schedule workers might earn you an extra $.50/ hour. He also gave each employee a budget for courses, even when those courses had nothing to do with making sausage.
To increase profits, you must constantly evaluate the products you sell; eliminating products that don’t perform well and introducing new products in high demand. Understand that every product has a lifecycle defined by consumer tastes, competition, and technology. Trying to retain a product line after its useful life results in poor profits. Consider the relationship between profits and stage in the lifecycle in the graphic below.
Highlighted in this image, we see the negative profits achieved early in the lifecycle and the sharp decline in profits toward the end of that lifecycle. Choosing to optimize short-term profits by ignoring product development ultimately destroys a business. Hence, to increase profits, you must look out for new products to replace those heading for decline.
Find new customers
Often, marketing is the first casualty when a company struggles to make desired profits and many new businesses don’t budget for marketing in their efforts to reduce startup costs. Both of these decisions inevitably result in failure. Remember, only customers generate profit for the business and you must allocate a budget for marketing if you want to increase profits.
Of course, you must focus on those marketing efforts with the highest ROI to ensure you use your marketing budget wisely. And, increasingly, businesses invest a higher percentage of their marketing budget on digital because it delivers results. Consider the ROI contribution of different marketing strategies shown below to see how you increase profits using digital strategies.
What tactics did you use in the past to increase profits for your business? Is there anything you did that was particularly successful? Let us know in the comment box below, our readers would love to hear about them.
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Hausman and Associates, the publisher of MKT Maven, is a full-service marketing agency operating at the intersection of marketing and digital media. Check out our full range of services.