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When
faced with declining profits, most businesses
respond with increased sales. Their thinking is
that there is a direct correlation between the
two. Increased sales means increased profits,
right? Wrong.
When
Furniture Brands International Inc., the largest
furniture maker in the world, posted fourth quarter
sales for 2003, at a glance, sales increased four
percent from the same quarter last year. Most
business people may assume that profits increased,
too. However, the furniture giants profits actually
fell 23 percent compared to the prior year.
Is
this fuzzy math? Not really. There were other
operational lags on the company, which impacted
posted profits. For example, the company absorbed
millions in charges from closing numerous factories
throughout the U.S.
In
a similar relationship, some companies actually
increase sales dramatically and earn lower profits.
How? By paying for growth. A simple example is
a carpet company that hired three additional sales
people to increase sales. While the salespeople
increased sales, their salaries, the increased
labor for installing the carpet and an increase
in two top-selling lines of carpet all impacted
profits. Increased sales do not automatically
equal increased profits.
We
use a powerful software program that allows us
to pinpoint key performance indicators that allow
us to identify trends in profit potential. Aside
from using a software program, you can examine
these areas that can impact profits. Examine the
following questions and you will most likely determine
many areas that could be negatively impacting
profits.
Customers
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Who
are your most profitable customers? What do
they buy? Why do they do business with you?
What additional products may they buy from
you? |
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Are
service fees optimized? |
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Are
any of your customers costing your company
money?
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Product
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What
is your most profitable product? Why? |
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What
is your least profitable product? Why? |
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What
can you do to increase profits on your least
profitable product? |
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How does your product compare in price and
quality to other companies? |
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How
can you sell more of the profitable products
and cut the least or no profit products? |
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Do
you currently link products with customer
targeting programs? Why not?
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Price and Profit
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What
is the cost of your best product? What is
the gross profit margin (sales less cost of
sales)? |
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Can you improve gross profit by increasing
selling price or reducing cost of sales? |
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Do you compensate sales teams based on profitability? |
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Does
it make sense to change the sales channel
based on customer profitability?
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Operations
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What
are your weekly/monthly operating costs? |
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What
are your largest overhead costs? |
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Is
there a way to reduce overhead costs?
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| Warehouse
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Is
your inventory in line with customer buying
patterns? |
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Could
your picking cost be improved with a better
warehouse layout? |
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Can
you increase truckloads, and reduce rush order
handling? |
The
questions above are only a starting point to pinpoint
where you may be able to increase profits and
more efficiently manage your business.
Many
companies hold onto products that have little
or no profitability. Rather than emphasizing the
companys best selling or most profitable product,
they spend company resources to develop, market,
sell and house low profit, high cost products.
One
such company noticed an increase in sales and
a decrease in profitability. After using a profit
analysis software product, they came to the conclusion
that one of its customer segments was not as profitable
from a net operating margin perspective as it
was from a gross profit perspective due to excessive
indirect cost incurred in serving the item. This
knowledge allowed them to implement a profit improvement
initiative to change their pricing infrastructure
and service policies in order to make their business
more profitable.
Whether
you use the questions above or call us to perform
a profit analysis product, you can be on your
way to improved profits today!
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