Although many of us understand our profit and loss structure and in which line items there are profit grabs, we hesitate to take advantage of these opportunities. It is helpful to review your business regularly and take comprehensive action swiftly to seize these profit occasions.
Here are some intuitive tips on improving vendor profitability not only during periods of business turmoil but also in relatively benign, upbeat times such as today.
Prepare for the Worst
Have you ever wondered why some businesses thrive during periods of upheaval or change, and some businesses crumble? The answer lies in one word: preparedness.
While good leaders are not doomsayers, they prepare their businesses for a potential crisis. Minimize your risk in the event of economic disasters or unforeseen events. While reducing the percentage Accounts Receivable and Days Sales Outstanding is a priority for businesses during crises, managers should also remain vigilant during economic booms. Do not expose your business to large orders payable in foreign currencies. Rather, hedge foreign currencies prior to accepting new orders to ensure satisfactory profit.
Do you really need all those trucks, forklifts, food and beverage equipment, or computers? Many times companies continue to pay depreciation charges for assets they no longer utilize.
“What are we doing with all this warehouse space?” As companies reduce inventory and adopt JIT and MRP inventory planning systems, old business models with multiple warehouses no longer apply. Consider centralizing into one large warehouse with nationwide service, or completely outsourcing your storage needs to a third party service provider.
Office space can also be “right sized” while still maintaining employee morale. By re-designing your office space, you could also have more common areas for meetings, collaboration and impromptu socializing. This new trend in office design is called “densification.” Even if your business is in an expansion mode and hiring new employees, by being creative you can maintain the same office space with more employees.
Each Stock Keeping Unit that your company develops, produces, stores, markets and sells incurs expenses. When was the last time your business culled the slowest moving 10% of your product portfolio? Pareto’s Principle usually applies to most consumer goods businesses, in which 80% of sales are derived from 20% of products. How much costs would be reduced if you eliminated 80% of your product range? If you took such drastic action, would your business be more profitable on a percentage basis?
Each time I have asked a Marketing staff to consider a price increase, there was resistance. “We will be higher priced than the competitor!” I was told. Each time we raised pricing, there were few complaints from customers, and those few customers that vocalized their disappointment eventually became accustomed to the new price structure and continued as customers. Do not fear price increases, particularly in our current phase of rising commodity costs.
If It’s “Fixed,” Eliminate It
A large expense item for most vendors is Selling, General and Administrative (SGA). This is the percentage of sales your enterprise spends to generate that revenue. To reduce it, consider starting a competition among sales teams or managers to see who can save the most SGA or other “fixed” expenses. In this manner, your employees will feel more involved and take ownership, rather than cost cutting being imposed upon them.
By reviewing your sales structure, fleet costs, support staff and other supposedly “fixed” costs, you can usually drop a couple points to the bottom line. “Unfix” your fixed costs!
Cash to Burn
Given the recent economic upturn, your business may now have excess cash. Rather than go on a hiring spree or buy that sexy state-of-the-art facility, first pay down debt. If you have minimized debt, then ensure you have enough cash in a low-risk, liquid investment vehicle. Those done, consider business improvements that do not add future fixed costs, such as employee bonuses or one-time upgrades to technology or equipment.
Nothing will improve your bottom line more than a laser focus on what you and your business enterprise do best. Spend time on your core competencies; for example, manufacturing high quality, good-tasting food and beverages that provide value to your customers and consumers. Outsource non-strategic activities.
By following these tips, your business will prosper in both bad and good times.
–Peter M. Guyer
Peter M. Guyer is the Founder and President of ATHENA MARKETING INTERNATIONAL (athenaintl.com), an international marketing, consulting and business development firm serving food and beverage manufacturers. Tel. (206) 749-9255.