There are always exceptions, but I believe that we can generally agree that one of the primary goals of business is profitability. Sure there are a boatload of intrinsically good reasons to start a business, and just as many indirect benefits and motivations, but few of us will argue that at end of the day it is the bottom-line that keeps us going.
The one question that I can guarantee that I will always be asked very early in the process when working with a company is some variation of "How can our company be more profitable?" I like to turn a question like that around in order to find out what I'm working with, and will reply in turn by asking what my client feels is the biggest challenges they face to increasing profits. Answers naturally vary based on a variety of factors, but the one that is always present is "We need to increase revenue". - I LOVE that response for one simple reason... I know right then and there that I'm going to be able to help this company, and they are going to be thrilled with the results.
I recently read an article that asked a number of executives, "What is the best way to increase profits?" Responses were collected from CEO's, VP/Director types, and consultants in a number of industries and from companies of various sizes. The results were almost split right down the middle, based on whether the response was revenue-driven or margin-driven. CEO's slightly favored cutting costs (margin-driven) versus increasing sales (revenue-driven), and VP's thankfully were a little more grounded in sound business thinking with 60% recognizing that higher sales doesn't mean the same thing as higher profits. Unfortunately (especially considering these are my peers) it was the consultants who couldn't stop falling all over themselves with creative, yet misplaced enthusiasm for ramping up revenue.
I should stop for a moment and address my concerns with the revenue-based responses. This isn't the correct article for me to make any disparaging statements about the sales people in the room, and increased sales is a wonderful thing. My message today is that increasing sales by itself doesn't necessarily make a company money, and it may actually hurt the bottom-line. What's that? I can hear the clamor coming from the audience, at least I could if I had an audience, but give me a chance to explain:
Raise your hand - or at least move your mouse around real fast in a counter-clockwise motion - if you have ever worked for a company that wasn't already trying to sell a service or product. One, two, three.... wait let's make this easier - raise your hand if you have every been part of a company that tried not to sell.... nobody? That's my point exactly - roughly half of those business leaders and innovators who responded with their very best idea to increase profits was to increase sales. Are they not already trying to do that? Thankfully we are all wired with the same innate desire to sound intelligent - so their responses were not quite a simplistic as I make them sound ((well except for the four geniuses who simply said "raise your prices"). There were some very well thought out ideas about improving customer communication, focusing on top customers, shifting emphasis from one form of marketing to another, up-selling, etc... Several of these responses were strong ideas, just not the "ONE" idea that would best identify how to increase profits.
Exceptions are out there, especially if you find yourself in an emerging market or have a new and innovative way to address an existing need. In these cases then yes, I can agree that increased efforts to market and sell will find the fertile and un-tilled soil of potential customers who are just waiting to be introduced to the latest and greatest. Beyond that, the low-hanging fruit has been gathered and there is a finite market out there in which increased sales generally require a company to wrestle customers away from competitors. Those customers willing to make a change are generally doing so because: 1. They are unhappy with their current supplier - and you face the challenge of making sure that a year from now you aren't the one they are unhappy with; and 2. They are looking for a deal - translation your increased revenue may be coming with discounts and concessions that lower the related marginal income. Almost without exception, customer acquisition costs related to uncovering new customers is going to be higher as you try to drive revenue and locate good paying customers in a dwindling pool of qualified and/or interested buyers.
My point - don't turn down new revenue - Yikes! Definitely don't do that. - Just don't fall into the trap of believing that should be your primary goal.
Not everyone has experience running a business, but we almost all have some understanding of the challenges we face in running a household, or at least a personal budget. For that reason, I try to identify analogies that I can use that are relateable to all of us, who at some point have been short of cash at the end of the month. A home budget isn't that different than your company's budget. When you need to put a little extra away each month to build up your savings in order to make a large purchase - large is relative, for some of us it is a new TV, other's a boat - but you get the idea, we try to cut back our spending to be more "profitable". Which is easier for the average two-income family that is already working full-time? Finding more revenue or cutting costs? (I'm looking for "cutting costs" - otherwise you can just stop reading now). That's right, it is generally easier to skip a night out, or cut some coupons than it is to get your boss to give you a raise.
I acknowledge that there is no magic wand out there for cutting costs, but based on one simplistic view of one article, I can certainly identify about 50% of the companies out there that are willing to try to improve their bottom-line by making some deals and increasing their sales.... that sounds like a lot of companies who will are willing to negotiate.
All companies are different, and each industry/company is dependent on different spending patterns and categories. For the sake of brevity (and I'm asking the accountants out there to please give me a pass on the way I'm breaking things out here, I know it isn't quite this simple, but the message should hold up...) I'm going to say that we have three different places a company spends money: 1. Direct Materials/Cost of Goods Sold ; 2. Labor; and 3. Everything else (overhead, utilities, insurance, interest, etc...)
I'm not messing with #2 above - I'm a strong believer that the last place companies should skimp is on their employees. There is too many reasons to cover in this post, but I'm a proponent of finding great staff and treating them great. Regarding #1 and #3 - in 20+ years, I have not seen one time where a vendor was approached in an effort to negotiate better pricing or payment terms, and they didn't come back with some sort of price break or payment arrangement that didn't reduce the overall cost. If you've had a different experience, then I guarantee that with a little legwork, you can find a company that wants your business bad enough to beat what you are currently paying.
There are always variables involved, but holding on to the old adage that "Cash is King" is a good place to start. Even if you can't get a direct price break - working out extended terms - going from Net 30 to Net 45 or even Net 60 is a great way to reduce the cost of capital on raw materials that are purchased, but generally won't generate actual sales until long after your company has paid the bill. If you are fortunate enough to be sitting on some cash, push for a discount for paying early - getting a 2% discount for paying in 10 days instead of 30 (20 days early) translates to a ROI of roughly 36% on that pre-payment. I can't think of many other ways to make 2% on your money in 20 days.
There are so many other ways to control and cut costs - it starts with simply shining a light on spending, reviewing expenditures with mid-level management will quickly reduce some purchasing that isn't particularly mission-critical. Longer-term planning can establish partnerships with your suppliers, increased efficiency through improved processes, investment in new technologies with payback periods that outpace the depreciation schedule (remember we're talking profits not cashflow), strategic tax planning, and outsourcing (Note - there is a difference between not valuing your employees and outsourcing functions that don't best fit within the organization).
Going back to the household analogy for a minute, it comes down to the basic understanding of a tax deduction and a tax credit (though we are looking at increasing sales and profits, not reducing them). It is good when our charitable contribution or mortgage interest is deducting from our taxable income - if your tax rate is at 30%, then for every dollar you get to deduct, your tax bill goes down 30 cents - not bad. It is AMAZING when that childcare bill or tuition payment you make is a tax credit, and every dollar you spend is a one-for-one direct reduction in your tax bill. A revenue-based argument versus a margin-based argument is the same thing - increasing sales gets you profit margin to the bottom-line, but every dollar a company can reduce costs is a dollar more it makes in profit.
Let's say your company has a profit margin of 8% - not fantastic, but reasonably close to the U.S. average depending on your sources (crazy side note - I read yesterday that the average American believes that company's average about a 35% profit margin - no wonder it is so easy for the government to mandate increased spending upon businesses for any variety of reasons, I won't step into the can of worms that is the list of what those increases are.) Back to the point - if your company is sitting at 8% profit margins and $10 Million in sales for a given period - increasing revenue by 5% translates to $500,000 in additional sales and $40,000 in additional profit (again I'm asking the accountants to not get lost on the argument of marginal costs, fixed v. variable, tax rates, etc.... I know these exist, but I can counter with increased staffing to handle more volume, customer acquisition costs, expenses related to a learning curve for a new customer, and concessions and price breaks offered to "win" the increased sales)...not too bad - 5% increase in sales increases profits by 5% as well.
Now what if you were able to reduce costs by 5% instead - no easy accomplishment, but if the focus hasn't been on cost reduction and control in the past, then 5% is absolutely an achievable goal for most companies. Sales stay exactly the same at $10 Million, profit margin at 8% means expenses are 92%, or $9,200,000. By reducing costs 5%, they are lowered by $460,000, which means profits are up $460,000 without earning a single dollar more in revenue!!!!
The difference to the bottom-line equals a marginal increase in profit that is 1150% higher by reducing costs versus increasing revenue. More importantly, your companies profit margin increased from 8.0% to 12.6%. End of Argument - Ridiculous numbers right???? Okay - maybe you've don't think a 5% reduction in cost is possible (if you don't we should really talk privately...) Let's say your company can only cut costs by 2% - an additional $184K in profit on the same revenue... 1% = $92K in this example... no confidence that you can save 1% - well I don't know what to tell you then, other that even reducing costs 0.5% with a 8% profit margin is still going to outperform a 5% increase in revenue!!!
Once you've taken the time to steam-line and maximize your profit margins, then go find those extra sales.... maybe increase revenue should be the second thing to do to increase profits.
Enough for now, I need to go apply for some CEO positions that should be coming vacant based on the responses given in that article.