Magazine article Industrial Management

Bulletproof Profit Models

Magazine article Industrial Management

Bulletproof Profit Models

Article excerpt


The economic crisis of 2008 has caused a heightened awareness about the need to take a hard look at business performance, cutting costs and being profitable. There are plenty of businesses making money today, but too often managers and executives get tied up handling the day-to-day demands of the business with little or no time to oversee the direction and efficiency of the daily operation. Profitability comes from cutting costs and increasing productivity, which is accomplished by having a planned profit model.

A planned profit model is a simple equation that ensures you act today, but plan for tomorrow: revenue - profit = expenses. The equation is a basic assessment of the three major components of any business: expenses, revenues and what's left over. In the past, this model placed profit as the outcome number, and many times it is negative or lower than expected. With profit as a fixed input variable, the amount is decided on and controlled in advance. Too many businesses use an old model, with profit as the result, and don't realize how much money they have generated (or lost) until the accounting period ends. The model is simple, but it can be the critical factor in whether or not a business is profitable.

Profit should be thoroughly targeted. What do you want your profit to be? Most managers and executives don't realize that profit is a number that can be decided upon. If your business is suffering, your profit should be adjusted for recovery. Set the mark so you are breaking even; pay down debts, cover operational costs and evaluate how you can further grow in future periods. If your business is thriving, you must be reasonable when planning your profit. It is important to keep in mind current and future debts, long-term and upcoming expenses and goals for future periods.

Sales figures and interest earned make up revenues. With deferred buying decisions, whether your business is successful or not, extending reach can increase sales. When extending reach, three key elements must be looked at and adjusted:

* Extend your demographic reach. What kinds of people or groups of people are using your product or service? What are the uses for your product or service? Commonly used demographics include race, age, income, disabilities, educational attainment, home ownership and employment status. Successfully targeting other demographics can increase revenues dramatically.

* Extend your geographic reach. No matter if your business is successful or suffering, extend your geographic reach in a cost-efficient manner. Look into untapped areas and evaluate how your business would succeed in those geographic regions.

* Extend your product and service reach. With a business that is suffering, extending the product reach can turn revenues 180 degrees. Think of what other products and services your organization can provide without changing operations. Many companies can make different products with the same inputs and operations at a lower cost and higher demand. For instance, when a Wisconsin-based contracted brick layer recognized a declining demand, it evaluated its options and saw the value in extending its reach. The company sent laborers to Chicago to lay glass block in million-dollar condominiums, which resulted in higher revenues. The demand for laying glass blocks is extremely higher than laying bricks for factories, and the company could do both at no additional cost.

Cutting cost is easier than most people think. The trick is finding which ones can be cut and how to do it. Looking into every cost your business has and identifying waste is mandatory. Many times, costs are connected to wasted efforts, resources, services, and operations. Waste itself is every organization's biggest competitor. To identify and eliminate waste and costs, review each issue separately. While issues vary from one business to another, common cost drivers and wastes include:

* Labor inefficiencies, such as too many employees, improper allocation of personnel for jobs and scheduling problems

* Material inefficiencies, including poor purchasing decisions, cost issues and wasted materials

* Service inefficiencies due to the business not serving customers effectively as well as vendors providing ineffective services such as marketing services that don't provide sufficient ROI

* Inventory control, which includes having too much inventory, not having inventory where it is needed and having too much cash tied up in inventory

Productivity and efficiency

Dashboards and metrics management are technologies that can be customized to overlay computerized database information for virtually any type of business. …

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