Your company is hitting its sales targets – maybe even exceeding them – but you’re not realizing the net income that you budgeted and counted on. Where are things going wrong? Is it your pricing structure? Are overhead costs too high? Are there inefficiencies in the operation? The answer requires a thorough look into all of the components of your organization’s net income (sales, cost of sales, and operating expenses) and the processes that create them.
Here are five things you might consider, and if applicable, implement to improve the profitability of your business.
- Reduce costs. Most companies successfully reduced their costs during the last recession in order to survive, and reaped carry-on benefits from it as sales and production levels recovered. However, the recovery may have masked increases in your overhead costs if unchecked during that time. A current review of these costs may expose opportunities for savings.
- Increase prices. Perhaps it is too obvious or not possible, but consider revisiting your pricing methodology nonetheless, especially in times of rising costs. And, where there is unique value in what you are providing to your customers, even more the reason to do so.
- Reduce your inventory. As noted in my previous article regarding inventory costs, carrying inventory consumes money, space, and time, all of which eat into the company’s profits and exposes it to risk of obsolescence. Reducing and effectively managing your inventory levels improves both cash flows and profits.
- Speed up your order to delivery cycle. If you can reduce the amount of time it takes from the inception of an order to its shipment, you effectively increase your throughput, which should result in higher margins. Adopting a lean philosophy of eliminating waste and bottlenecks in your processes can help to accomplish this.
- Eliminate unprofitable products or customers. Not all products or customers are created equal in terms of contributing to the bottom line. Therefore, it may make sense to redouble your efforts on your higher margin products and/or customers and, to the extent that those of lower margin cannot be improved, consider cutting them out of your business.
Successful implementation of any one or a combination of the above will, all things being equal, result in increased margin falling directly to your bottom line.
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