Profit Improvement

Most businesses want to make more money. They concentrate huge amounts of time, energy, and resources every week of the year trying to do exactly that.

Yet, you might like to try this experiment.

Think back to all the time, effort, and money your business has put into trying to improve its profits in the last 12 months, add up all the “future profits”, either by way of revenue growth or cost reduction, that you were promised when you originally gave those projects the green light.

Now compare the amount of money your business makes today to what it made a year ago.

There’s probably a big gap between those two numbers.

And not usually in the good direction.

Generally, it’s not that your team weren’t sincere or didn’t work hard enough. It’s because they were operating at the wrong level to make a truly sustainable step-change in your bottom line results.

On the ground vs 30,000ft

How it works in most organisations is that the Marketing Manager makes a proposal to reduce the cost of leads, say, and claims that as a contribution towards growing the bottom line. The Logistics Manager makes a proposal to fit devices in the trucks to monitor driving habits and improve fuel efficiency, and similarly claims that as a contribution towards the bottom line.

There’s nothing inherently wrong with their ideas, and they’re generally made in the right spirit. The trouble is that apart from the owner – or the board, perhaps, in larger businesses – nobody has the right perspective for knowing what changes need to be made for the benefit of the business overall, and how to make those changes stick.

Each of your managers is working with a very limited forward view, and an equally limited ability to influence everything they would need to delivery transformational change in your business.

This problem is exacerbated by the fact that most of your managers will think mostly of results on a relatively short-term time horizon, as that’s going to determine their ability to get promoted or find another job elsewhere. Contrast that with a business owner who looks at a time horizon of at least 5 or 10 years…perhaps a lifetime.

And it’s by no means impossible, even if they don’t mean any harm, for “improvements” in the short term to turn into major problems in the long term when you don’t have a 30,000ft view of the business.

A real life example

Let me give you an example from my own career. Several years ago I worked for a business which had gone through some difficulties and their bottom line performance was, to put it as elegantly as possible, holed below the waterline.

They lost millions every year and leaked cash like I’ve never seen before.

Most of their problems were in a single division of this business. Ironically the largest division. There, the divisional CEO had responded to a downturn in revenues a few years previously by scaling down the budgets of all his direct reports.

Sensible enough in the short-term. There was a rationale for this in an old board paper. He was told to get on with it. And spending did reduce the following year, which he claimed as a victory with the board.

The only problem was, the bottom line financial results that year were worse than they had been in the previous year. So he proposed an intensified version of his plan to be rolled out the following year as “the problem was clearly that we didn’t cut deeply enough the first time” which the board, with a little more reluctance, also signed off.

It won’t surprise you to learn that the following year’s bottom line performance was even worse. Which puzzled the board as they’d had a couple of years of promises that these cost cuts would repair the bottom line and put the business back to where it should be in profit terms.

When I came along about three years into this dispiriting cycle, it didn’t take that long to work out what the problem was. Not because I’m a genius, but because nobody else in the business had taken a 30,000ft view up to that point.

Here’s what really happened

Under the hood, here’s what really happened.

To make his budget cuts “fair”, the divisional CEO had taken a flat rate percentage off the budgets of all his direct reports. That included the marketing and business development teams who brought in the revenues he needed to sustain his bottom line.

Because these teams had some good people in them, they had made performance and efficiency improvements under their own stead in the few years this cycle had been running up to this point.

To some extent, this mitigates the impact of the budget cuts, but after several years of this, the gap was too big to close. By the time I got there, the marketing and business development teams had had their budgets reduced by 50% against a backdrop of expecting a 5-10% year-on-year growth in sales revenues.

The divisional CEO was trying to do the right thing, and from his position on the ground the strategy made sense. But it was a short-term strategy which needed a 30,000ft approach to handle the long-term challenges in the market.

By trying to solve a long-term problem with a series of short-term solutions, not only was the root cause never tackled, but some of the short-term decisions made it less likely the longer-term problem would ever be solved into the bargain.

The divisional CEO needed a comprehensive approach. Instead he implemented a very narrow one.

Your recipe for profit improvement

There are three simple steps to delivering a dramatic improvement in your profitability.

  1. First, you need to focus on building your sales revenue by adding more value to existing customers and finding new customers who are eager for what you have to offer. While you are probably already working on this, the likelihood is you would make some different decisions with a 30,000ft view than by just pursuing tactical improvements in lead generation or conversion strategies.
  2. Next you need to look deep into your cost base, and develop systems which allow you to build those sales revenues at the lowest possible cost, through the way you manage your productive capacity, the clients you sell to, and the products and services you sell them. Very few businesses have an “inside view” of their cost base in the way we show you, and it’s the secret to understanding how your business can really make more money.
  3. Finally, you stop doing all the things that don’t contribute to either point 1 or point 2 above. That doesn’t necessarily mean getting rid of people. It might be the only option occasionally, but I’ve rarely found that necessary because, if you get the sales revenue generation right in point 1, there’s nearly always plenty of new jobs for people to move into.

How to get started

I’ve yet to see a business which couldn’t be more profitable than it is today, with stronger cash flow and greater control over its own destiny.

But it does mean thinking a little differently about your business. Some of the most effective, fast-return, high pay-off strategies are a little counterintuitive.

A good place to start is with my free email course – 10 Simple Strategies to Boost Your Bottom Line Profits and Cash Flow. Over the course of 10 days, you get one fresh strategy each day to “road test” inside your own business.

All the strategies I share are low-cost, low risk, and pay off fast. So why not give them a try?

The first strategy can be with you in just a few minutes. Click the button below and I’ll get the first module across to you as fast as the internet can get it there.

Alastair Thomson

Business cost reduction and profit improvement specialist.
Experienced CFO, CEO, and Chairman.