There are essentially two ways to make a business more profitable:
- Sell more at the same margin
- Sell the same at an increased margin
Selling the same at an increased margin means finding ways to sell the same quantity at a higher price, or selling the same quantity at the same price, whilst reducing your costs.
This article looks at the second of these, increasing your margin by decreasing your costs
Costs are an inevitable part of any business and the only way to achieve zero costs would be to close your business entirely. But that doesn’t mean you have to accept your current levels of cost, especially if your business is not as profitable as you would like.
There are a number of key drivers of cost that can be considered when a cost reduction is required but two big ones are Suppliers and Complexity.
Frequently in our consultations, we see businesses that selected a supplier some years ago. Maybe this was on the basis of competitive costs, uniqueness of product or some other feature. But frequently this has not been revisited for years.
So the first order of business is to look at your current suppliers and see whether they are still the right ones for you.
To do this, you should start by making a list of annual spending with each supplier for the preceding 12 months. The reason for this is that you will quickly find that some costs are accrued daily, some monthly and some quarterly or annually (of course a small number will be even less frequent but this will cover the main ones)
It makes sense to start with your largest first. Although in many businesses, these will also be the ones that are most frequently reviewed, and where you have least room to negotiate because these suppliers are probably core to your business. Nonetheless, you should challenge yourself to try – a small percentage gain here can make a big difference to your bottom line. Maybe you can achieve that by switching, or maybe you can talk to your existing supplier and suggest you are planning to switch and see if they will counter-offer.
However, the real gains are probably in the next batch down, things you maybe pay for infrequently, but are expensive, like software licences for example. Software is a great example because it is constantly moving and you may well find the package you invested in ten years ago is no longer the most cost effective for your business, or that a newer solution may give you additional benefits like automation (more on that later). A well executed software migration, may have a one-off cost but could continue to pay dividends for many years.
Finally, there will be a long tail of small costs. It may be tempting to just ignore these as they are all individually small amounts, but you should force yourself to look at all of these. In some businesses, these individually small suppliers can account for up to a third of the overall cost base. It may well be that a better deal can be had by amalgamating several suppliers into one and getting bulk discounts or in fact it may be that you can simply manage without some of these.
Complexity in your business is a major driver of cost for two reasons. It is a driver
Directly: because it requires more work to achieve the same outcome
Indirectly: because through increased error rates, it causes more wastage (either in terms of physical materials, time, or both)
New requirements can sort of get “bolted on” to existing processes, forms are modified and things generally evolve from how they were started.
As a result, many businesses have developed a way of doing things that has evolved over time. This is driven by the preferences of the individuals who do them, rather than designed from scratch to be maximally efficient and require minimum effort.
Only very rarely does someone stand back and consider how the whole business should be designed, and thus where the greatest efficiencies are available.
And yet for the people working in those bottlenecks, they are a source of everyday misery.
Nearly any business that has a few employees or more will benefit from a complete process review and redesign. This should start from the perspective of what the desired outcome should be and work back from there to develop the best way to achieve it.
But such a redesign must be first and foremost informed by the journey the customer makes through it. After all a business is there to serve it’s customers, not the other way around.
So constructing the ideal customer journey and then putting in place the right processes to achieve it is the first critical step.
Systems and Automation
This work should be underpinned by reviewing the systems that support it, to ensure that they are well aligned and that as many steps as possible are automated. This will not only ensure that the costs associated with both effort and wastage are minimised, it will also ensure that the business becomes scalable.
And a scaleable business has a lot more options to further increase profitability by increasing sales volumes, because if you can double sales, without having to hire twice as many staff, then you have the ability to scale up fast. Whereas if your growth is fundamentally tied to your headcount, it will slow the speed of growth whilst you onboard more people.
Moreover it will cap the maximum sales your business can achieve, since ever increasing numbers of staff, equals ever increasing complexity in parts of the business such as HR, training, communication etc which are not directly selling your product or service. This means that the incremental benefit of each additional staff member is slightly lower than the one before, eventually reaching zero.
Process redesign and automation is not easy to do but the knowledge required to begin this journey exists within every business – it just needs to be unlocked!
If your business is affected by the challenges discussed in this article, why not get in touch for a free initial consultation. We will help you to start your journey to increasing profitability without increasing your costs