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Every manager and owner operator is interested in increasing the profit of the business units they manage.

Profit Savvy has distilled a wide range of advice and methods to enable you to do this and has grouped them into a Menu of the recommended sequence of events so that you can realistically hope to double your profits from your existing business in three stages.  This is Yellow Belt material.

 

If your business is in trouble, the first stage aims to stabilize the patient in 30 days. As profit might be little or nothing at this stage, its not going to be hard to double it!  This is DP30 (for Double Profit in 30 Days)

The second stage is a rapid program to tune up what you have already got.  Any business running for a while will have some "barnacles" on it holding back progress and ramping up expense.  We allow 100 days for this so we call it DP100 (for Double Profit in 100 days)

Stage 3 is spread over a year and aims to double profits again.  This will take more time because you now have an efficient business so gains will come about not from efficiency but from an increase in revenue; a slower process.  We call this DP365 (for Double Profit in a Year).

I bet you are skeptical about this even being possible.

Here are a few examples showing the impact of small changes on overall profitability.

Case Study 1

Let's take a simple example with figures for a reasonable small business.

Assume;

  • $1 million in Revenue and we think we can improve this by 5% or 5 cents for every current dollar - not a big ask
  • $250,000 in variable cost which we think we can reduce by 5%
  • $580,000 in fixed or overhead costs which we think we can also reduce by 5%
  • the profit in this example will move from $170,000 to $261,000 or a 54% increaseNot too shabby.
  • for fun, if we increase the improvements to 10% in this particular example, the profit improved by 108%!

Here is a PDF of that data worked in a spreadsheet DP100-Profit-Improvement-Calculator.pdf 

Now it's your turn!

You can download both the PDF and an Excel spreadsheet here.

Substitute your own information from a recent annual accounting report and put in the percent improvement you think might be possible.

We don't know your financials, but chances are that you can boost your profits.

Case Study 2

Let's use a simple hypothetical case study to demonstrate how all the steps we will cover can add up.

Let us assume you have a business turning over $1,000,000 in sales and making a 5% profit before tax which is $50,000.

This means your costs are 95% of the sales or $950,000.

Let us say labour, which is typically 60-70% of costs, is $480,000.

Remaining fixed costs are $235,000 and variable costs are also $235,000.

 

Activity

Assumed improvement

Amount improved

Additional profit %

Product range reduction

5 loss making products out of 20 are dropped from the range saving $2,000 each.

$10,000

20%

Location reduction

1 warehouse dropped at $5,000 p.a. rent

$5,000

10%

Variable cost

5% quantity discount on 20% of inputs

$2,350

4.7%

Fixed cost

No improvement

0

0%

Labour

1 store man dropped when warehouse closed $30,000

$30,000

60%

Relieve constraint

Say 10% improvement in production throughput. $100,000 in revenue @ 5% profit margin

5,000

10%

Sale surplus capacity

Say 1% of turnover $10,000 less variable costs of $2,350

7,650

15%

Inventory run down

Once off improvement of $60,000. Not counted as not repeatable

   

Improved sales

Say 10% improvement in sales revenue @ 5% profit historically. $100,000 @ 5%

$5,000

10%

Smarter Pricing

Say 1% improvement in pricing on $1m in revenue

$10,000

20%

Totals

 

$75,000

150%

 

From this realistic example, profit went up by $75,000 which is a 150% improvement over the $50,000 present profit.

Did any of these steps seem particularly difficult?

Might they reasonably been at least identified and started in the first 100 days of DP100?

We encourage you to use this template to estimate your own profit increases from putting this plan into motion.

If the results look promising, you have;

  • set yourself a minimum goal of beating what you have quickly worked out and
  • reassured yourself that it might be possible and therefore worth making the effort to try 

Case Study 3: Factories

Over several years of applying the skills you will start to use in the DP Series, US manufacturing company Wiremold reported the following results.  Remember, most of the improvement will be in the early days because there is more 'low hanging fruit" for you to harvest;

  • production lead time dropped from 4-6 weeks to 1-2 days
  • productivity went up 162%
  • gross profit went from 38% to 51%
  • working capital tied up in inventory and work-in-progress dropped from 21.8% to 6.7%
  • inventory turnover (important because it means you are selling product) went from 3 times a year to 18 and
  • the value of the company on the market went up 2,467 percent

Case Study 4: Offices

You might be in an office environment rather than a factory or shop. 

You might be thinking that there is not much that can be improved in an office environment.

In fact, experts like William Lareau, author of Office Kaizen, say that there is often more opportunities for improvements in the office than the factory because, in the factory, opportunities are often fairly visible and obvious.  In the office, they tend to be more camouflaged.  

Case Study 5: Retail

Global business consulting company McKinsey and Company quoted the following indicative improvements in the retail sector from implementing the techniques outlined in the DP Series;

  • 10% increase in comparable sales 
  • inventory reduced by 10-30%
  • labour costs reduced by 10-20%
  • stockouts (run out of stock) reduced by 20-75%
  • profitability increased by 5-10% 

Case Study 6: 1% Price chage gives 11% Profit boost

Price is a major determinant of the profitability of your business!  A price change of as little as 1% can often lead to profit increases of up to 20%

consultant study across 1,200 major businesses found that a 1-2% increase in price, assuming demand remained constant, on average would have increased the company’s profit by 11%. Clearly, this could be a quick boost to your company’s profitability.

For a quick example of the impact of a price change, consider a business turning over $500,000 per year.  Let us further assume that it makes a 5% profit on that, which gives it a profit of $25,000.

If it increased its price by 1%, and assuming demand remained constant, that would lead to an extra $5,000 in profit because there is no change in cost from the price increase. This extra $5,000 over the original $25,000 is a 20% improvement.

What's Next

As the manager in charge of this process, very little will happen until you, personally, make a startThis is something that needs to be led from the top.  Although some of the data collection and analysis might easily be done by a member of staff, you need to be seen to be the main mover behind this project if it is going to get any uptake from your staff.

Later, we point out that most of your staff will not be overly enthused by the exercise.  You will need to be seen to be taking the project very seriously and monitoring its progress very closely.

We encourage you to do the DP Series in order.  If your business is not in trouble financially, you could maybe skip DP30 in detail but do check it out for things you can do in DP100.

There is little point in doing DP365 before DP100.  DP100 "scrapes off the barnacles".  You don't what to waste resources dragging barnacles along in DP365.

The next step is yours!

The journey of a 1,000 miles begins with a single step. (old Chinese saying)

A Disclaimer

We don’t know your business and its environment so we can only offer general advice on what might assist you to grow the profit for the business you presently have.  You should always seek professional advice on specific matters only discussed in general terms here.  For the same reason, we cannot guarantee a doubling of profit in any step of the DP Series as we do not know your particular circumstances.

 

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