How To Improve The Profitability Of Your Business
There are many matters that can indirectly affect the performance and therefore the profitability of a business.
During my next series of blogs I would like to talk about some of these issues:
1. External factors – the business at large (such as the economy, industry and legal issues)
2. Internal factors – within the business (e.g. accounting practices and management).
For now, I will look at some business at large factors, in particular industry decisions to be considered around corporate structures, competition and reliance on one industry.
Tax versus commerciality
A complex group legal structure raises alarms bells for me. A group of companies, in my opinion, is often unnecessarily complicated in an attempt to minimize or avoid tax. When you add up the compliance costs to maintain such a structure, together with the delayed decisions that result from trying to understand the effect a transaction may have on the group, the maintenance of such a structure may not be worth it. It may also hinder understanding the true profitability of a transaction if costs are hidden within other group entities. Profits will not be achieved through using a complicated tax structure, rather through sound commercial decisions.
Big players squeezing out the small
Big players squeezing the margins of smaller players will affect the profitability of a smaller business. This threat gives rise to an opportunity for smaller businesses to review their supply chain for better pricing, review their production processes for efficiencies and look for a possible merger or acquisition to mitigate a continual squeeze on margins. This may also present the opportunity to downsize and concentrate on the high margin products or services which you can provide/produce better than your competitors.
Possibly your business is closely dependent on other industries, which may be in trouble themselves. It is important for management to look at ways of spreading their customer risk so that they are not reliant on one source of revenue. This may include adding a different service line (consulting, board advisory), targeting a different market segment (residential versus commercial) or again downsizing until such time as the industry realigns.
I have touched on only a few matters which should be considered when looking to enhance your organisation’s profitability. I will, in my next blog, address other external and internal issues which can affect profitability.
Kevin Higgins is a senior executive at Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.