Improving profitability in challenging times

There’s no clear-cut recipe for success in a down economy, but there is a clear-cut objective: find ways to do more with less. Organizations are constantly struggling to do just that, some with more success than others. Those that are successful are typically willing to change the way they operate, are open to new ideas, and are willing to implement the necessary changes and ensure they stick.

Below are some strategies to help organizations position themselves for success. While they aren’t new concepts, they are best practices and a good start toward improving profitability at any company.

 If your organization is underperforming, it’s important to ask for help sooner rather than later.

Reduce Costs

Beyond simple cost-cutting efforts, management needs to objectively assess the various costs within their businesses in terms of what’s absolutely needed, what’s nice to have, and what may be viable alternatives. Considerable sacrifice is often required on the part of all members of the organization — including its owner. A few areas to look at early in the process include:

• Energy Costs.
  Transportation and utilities costs have sharply increased within last year. As a result, companies may save considerably by finding creative ways to reduce energy use and changing consumption habits. For example, a manufacturing client was running a pneumatic air press 20 hours a day, even when the machines it powered weren’t running. Something as simple as turning off a press when it’s not in use can save money.
• Employee Benefits. In recent years, many companies have moved to higher deductibles and co-pays or switched carriers. It’s important to have a sense of what similar organizations are doing to make sure you’re in alignment. Therefore, we recommend conducting periodic employment benefit reviews and shopping benefit providers.

Evaluate Core Processes to Improve Efficiency

Eliminating waste, or non value-added steps, in all areas of the company should be an ongoing process. In many cases, the best sources for finding effective ideas for eliminating waste are the employees and managers, but keep in mind people have a natural tendency to see savings in areas other than their own. The challenge is getting employees at all levels and areas of the company to accept the savings initiatives that affect them.

Sell or Dispose of Underutilized Assets

Companies often have excess equipment, inventory, and even real estate that’s no longer used in the normal course of business. Such assets are typically retained because business owners view them in terms of their historical value to the company, even though the value has significantly diminished because they’re no longer vital to core operations. There are two benefits that may be gained from selling or disposing of such assets:

• Cash to Reduce Debt: Cash from the sale of underutilized assets may provide a considerable one-time cash gain that can be used to reduce debt and the cost associated with it.
• Reduced Holding Costs: Oftentimes such assets have holding costs that are much higher than may have been considered. By selling or disposing of these assets, the company may experience ongoing savings.

Evaluate Profitability by Product/Service and Customer

Companies need to determine which products/services and customers are profitable and which aren’t. This may seem like common sense, but we often find that organizations don’t regularly measure profitability at the product/service and customer level. More often their assessment of profitability is based on the original cost estimate used to develop their proposal, or it doesn’t include all of the costs associated with the product/service.

Expand the Company’s Sales Presence

People generally do things a certain way because it’s always worked in the past, but conditions change. Therefore, companies need to consider other sales channels such as third-party manufacturers’ representatives, distributors, and geographic expansions via joint ventures.

Manage Cash More Effectively

Too often we find situations where clients are unable to pay key vendors on a timely basis while they wait for their customers to pay them or sit with too much inventory on hand due to poor inventory management. As a result, they incur increased cost related to premiums for smaller orders, expedited freight or — in extreme cases — a disruption in the flow of materials required to complete orders. Therefore, cash management should be considered a critical function in any company.

In Conclusion

While there’s no magic prescription for weathering a down economy, these strategies can help. For more information regarding how to remain profitable despite the challenging economy, feel free to give us a call.

Unhappy Situations Can Have Happy Endings

If your organization is underperforming, it’s important to ask for help sooner rather than later. Consultants can do more, and are less expensive, when they can focus on fixing the business versus managing short-term cash crises.

If it looks like the situation is too severe and the company is not salvageable, delaying the inevitable usually only makes the situation worse. It’s important to develop an orderly wind-down plan that maximizes value. Evaluate whether you can sell off parts of the business to a competitor or expeditiously and cost effectively wind down the organization.

This is every business owner’s worst nightmare, but even these unhappy situations can have happy (or at least satisfactory) endings.