“Overhead is dragging my business down. Revenue is growing but so are my costs. I”™m not making any more in profit than I was before when revenue was lower. It makes me wonder, ‘Why bother trying to grow this thing?'”
Thoughts of the Day: Make sure to separate costs that should fluctuate from expenses that are more constant in nature. Consider the impact of less obvious cost-drivers such as complicated customer requirements. Verify that pricing margins match overall company goals. Ask everyone in the company to contribute to a dialog: “Do we really need to be doing this? How could we do this more simply? How could we do this better at lower cost?”
Many business owners find that growing sales doesn”™t result in a significant increase in overall profit. Their level of frustration makes them question the value of growing the business. They lose sight of the fact that if sales aren”™t growing by at least 8 percent to 10 percent per year; the business is at risk of long-term decline.
Separate “cost of goods sold” from “overhead” expenses. Cost of goods sold should follow the same up and down track as revenue. Overhead should be constant month after month.
Separate marketing and sales within overhead. They are fuel that drives up revenue. They increase ahead of revenue growth, then drop as less effort is needed to maintain the new level of income.
Look at the role customers play in driving costs up or down. Not all customers or products are equal. Some products may have more complex requirements. Some customers may be better negotiators. Graph revenue and cost of goods by customer and by product to find trends.
Focus on customers and products with the greatest cost of goods sold as a percent of revenue. Look at what influences that percentage. Ask:
Ӣ Is this customer or product worth the extra effort and lower profit margin?
Ӣ How much more profit would result by shifting resources away from a less profitable product or customer to doing something with a higher margin?
Ӣ What kind of advance spending in marketing and sales would be needed to make the switch? Would that switch pay off over time?
Question all overhead costs. Are they necessary? Is there a more efficient way of doing things? Could adding a computer program with a one-time installation cost produce long-term savings? What about the potential for efficiency that comes with shifting employees from generalists to specialists?
Does the company have an overall goal for the margin it wants to make? Is everyone in the company aware of that goal? Do all employees understand their role and responsibility for keeping costs down? Do they have a way to measure and manage how well they are doing at reducing costs?
Many business owners make the mistake of not sharing enough information on product and customer profitability. Some owners fear letting employees know how much they”™re making. Keeping employees in the dark about the numbers of the business and hiding the results of efforts to improve profit margins is crazy behavior.
Employees can have a major influence on costs. They need to see the results of changes in order to understand what”™s working and what isn”™t. Graphs of cost of goods sold percentages, overall, by product and by customer, will help everyone better understand and analyze what”™s going on.
Engage employees at every level. Teach them to constantly question whether the way things are handled is the most efficient and effective. Encourage disrupting the status quo in favor of testing possible improvements. Establish work groups to tackle questions about costs in specific areas. Make sure employees have time to meet to discuss what they”™re working on, to report results to others in the company and to brainstorm new initiatives.
Andi Gray is president of Strategy Leaders Inc., strategyleaders.com, a business-consulting firm that specializes in helping small to mid-sized, privately held businesses achieve doubled revenues and tripled profits in repetitive growth cycles. Interested in learning how Strategy Leaders can help your business? Call now for a free consultation and diagnostic process: (877) 238-3535. Do you have a question for Andi? Please send it to her, via email at AskAndi@StrategyLeaders.com. Visit AskAndi.com for an entire library of her articles.
