Profit Improvement Initiatives
3 September 2010
One of the key aspects of any business turnaround is, of course, profit improvement.
There are many methods of improving profitability, including cost reductions, increasing sale price, outsourcing and improving product mix and gross margins. I will touch on a few of these techniques in this and future few blogs, and provide some tips on how to get started with these initiatives.
Gross Margin (as a total $ or %)
You should start by doing an analysis of you current margins and compare these to the industry average.
One area for improving gross margin is by conducting a detailed analysis of your existing customers and products to determine how much margin they actually contribute to the business and whether their current volume of purchases justifies keeping that particular customer.
If your margins are the same as your competitors, you may wish to consider culling some of your low margin customers. This will allow you to focus on increasing revenue from existing higher margin customers whilst cutting advertising costs and improving profits at the same time.
Pricing should be reviewed at least every 6 months and be supported with a detailed cost and competitor analysis to support any suggested price increases. The costing analysis will allow you to determine your existing breakeven point and profit margins.
This review will also demonstrate how your product is positioned in the market place, industry demand, and give you an understanding of the changes in the market place.
The traditional wisdom is that the major benefit of outsourcing is cost savings. However, the additional business controls gained by outsourcing (production planning, for example) make this an option worth seriously considering. Improvements can also be seen through increased reliability on operations of the company.
I have touched on only a few issues which can impede the implementation of a business turnaround strategy.
I will, in my next blog, cover in further detail some of the topics covered in this blog as there are many more tips and hints to relay in relation to this phase of the turnaround. If you have your own tips that have worked for your business, please share them with us.
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.