If you set out to improve your profit by one percent, will you succeed? I bet you won't and here's why: It's too small a target to drive sustainable change.
That is not a reason to give up. Let's just change how we look at the problem. To begin, there are three obvious places for companies to improve their bottom line.
- Improve revenue: Charge more for the same services
- Increase gross profit: Spend less delivering goods and services
- Reduce overhead: Manage your fixed costs
A one percent increase in revenue minus one percent of overhead plus one percent more gross profit equals - what? I'll wait.
In the typical $5 million production rental company with an average 50% COGS and 40% overhead, a one percent improvement on all three fronts is worth - drum roll please - $106,000. That's a full two percentage points of net profit increase. Forever.
However, on any given month these three metrics fluctuate MORE than one percent each. How can we manage such a small change in the midst of big fluctuations? Here's the trick.
You can't target 1% and get 1%. In fact, if you target 1% you will get a yawn.
If you target 5%, you might get 1% in the first year. The next year you will get another 1% or better (because now you know how good it feels). In five years, you will have increased profit from 10% to 18% without growing the business.
"We have talked about it and nothing happens. Work gets in the way." I know.
Here's what you can do that doesn't require a lot of meetings. Ready?
- Raise your labor prices 9%. Why not 10%? Because if I said 10% you would balk. Its a psychological barrier. If your hourly rate is $50, make it $54.50. Who can't sell that? Plus, labor is perhaps 50% of your revenue, so the yield approaches 5%.
- Labor is your largest COGS. Replace some of your overtime with a new full time employee or more outsourcing, whichever is less. Conversely, if you have low overtime and high unproductive time, then keep fewer employees. The more volatile your business, the more you need outsourcing. Change one or two of your headcount either way.
- The easiest way to reduce overhead is to grow. It takes the same overhead to run a $5 million company as it does a $7 million company.
One percent will change everything. So, target five percent. Sometimes business is simpler than it looks.