It is usually possible to improve the revenue of a business unit somewhat by tuning what is already there. Since our assignment is to Double Your Profit in 100 Days, we now turn to quick and simple revenue raising opportunities. Earlier articles in this Program discussed getting started and improving profit by reducing Costs. This is a Yellow Belt Program.
As we have stressed in other parts of DP100, there is no right way to go about the opportunities in this article.
We encourage you to just get started with the ones that seem easiest to you and aim to "eat the elephant one bite at the time".
Speed and getting started is far more important to your successful outcome than is taking time to ponder and plan what to do. Your stretch goal is to get as far down this particular road as you can in 100 days.
The technical term Throughput refers to the process of moving production through your business and eventually culminating in cash in your hand from a paid-for sale.
By the time you reach this point in the DP100 Program, you may have learnt how a strong focus on wasted effort and resources in your business can substantially reduce your operating cost. The other side of that same process is that the 'flow' of product through your business systems should have improved. The faster flow/throughput gives you some revenue increasing opportunities as well. If not, go back to the article A2.3 DP100-Reduce Costs to do that step.
Even if your product is a service, it involves a work flow/production cycle.
In this section, we want to turn our thoughts to how we can rapidly improve the throughput of the product through your production cycle. You may have already covered some of these issues in earlier articles but we touch on them again in case there is a different perspective to apply.
Identify the Constraints
The Theory of Constraints (TOC) tells us that there is likely to be only one, and certainly no more than a very few, bottlenecks/constraints in your system.
Wherever that bottleneck exists, it means that production cannot proceed through your production cycle any faster than the speed at which the bottleneck can handle it.
Therefore, it is important to firstly identify the bottleneck and then work very hard to reduce its impact on production.
We describe this in more detail in the TOC Menu article.
Any improvements that you can make to the efficiency of your constraint in your production system is likely to go immediately and totally to the bottom line since little or no further costs might be required to make that bottleneck work efficiently.
It is not possible to know what impact liberating your bottleneck/constraint will have but experts say a 20% profit increase is often achievable.
As part of your TOC exercise, it will become clear to you that a number of parts of your production cycle have more capacity than is necessary to service the constraint.
In a poorly managed business, managers will nevertheless have these stations producing at their maximum capacity. The principle outcome of this will be that there is a large build-up of work in progress in front of the constraint and a stockpile of produced components of your product after the non-critical work stages (see Local Optima article for the profit hit this causes).
There may be an opportunity with some of your surplus capacity that you can take advantage of and which will go directly and immediately to your profit bottom line.
If you can find some other use of this surplus capacity, the output from those work stations can be sold outside the company and generate more income without reducing the ability of your bottleneck to continue to process components of your product.
We talk more about these opportunities in the Local Optima article. There is also a concept known as Throughput Accounting which also demonstrates how surplus capacity can be very profitable. (see Throughput Accounting article).
be mindful of the old adage; "revenue is vanity, profit is sanity and cash is king!".
There are a couple of quick boosts to your cashflow that will help to give you working capital for use in tuning other parts of your business.
By the time we have arrived at this point in our make-over exercise, we have identified those products that we are going to keep and we have identified the bottleneck in our production cycle.
Because we have reduced our product range, we are likely to have an inventory of this now redundant product. This suggests that we should explore methods of selling out of this now redundant inventory as quickly and as profitably as possible to give us a once off cash injection and reduce the cost of inventory on the balance sheet which will increase the profit bottom line. Although this is a once off exercise, it may be very worthwhile and is certainly preferable to having now redundant inventory becoming less and less valuable as it deteriorates on shelves.
After identifying the bottlenecks in the production line and implementing the associated Drum-Buffer-Rope strategy (see Drum-Buffer-Rope article), it is very likely that we can also run down the stock pile of work in progress. While this work in progress is running down, we will be buying less resources to input into the production cycle. This will be a once off further saving that can go straight to the profit bottom line. Again, this is only a comparatively temporary measure but will kick your profit along.
A few notes of caution when running down inventory. If you sell to your normal buyers it might have the following possible impacts;
- you will fill their demand for some time (called "Channel Stuffing") which means your normal sales will decline for the time it takes to sell the inventory
- you will likely be discounting this surplus which will depress your profit during the sales period
- you will also be moving inventory off your Balance Sheet which can have the effect of reducing your Profit in the Profit & Loss Report so consult an accountant if you have someone (like a bank) closely watching your profitability
- you may be selling those customers an older, and possibly inferior, product so make sure this will not reduce your reputation with them
Alternatively, if the product is not too inferior, this might be an opportunity to sell at a discount to new buyers to give them a taste. Just make sure you existing buyers understand that it is an inferior product so they don't think you are discounting behind their back.
For more reading on Inventory management, search for inventory in the website. Following are several useful links;
- Profitable Inventory Management
- Inventory Reorder Points
- 80/20 in Inventory Management
- Capture Waste in the Wild
Traditional accounting gives a somewhat false impression of profit in that it accounts for profit once an item is sold; rather than when the cash is received. Until the cash is received, the profit has not truly been realised.
The TOC concept of Throughput (see Throughput Accounting article) takes this into account and argues that, realistically, profits shouldn't be counted until such times as the cash is received. If you can speed up the cash collection then your throughput of your production cycle has a corresponding increase.
This means that if your cash receivable process is in poor condition, the cash in hand that you might otherwise have will be delayed.
One way to improve your profitability picture is to improve your accounts receivable process.
Very often, this might be by way of offering a cash incentive for early payment, but this approach will have the effect of reducing profit; especially if the person would have paid eventually. Therefore, better ways of speeding up the Accounts Receivable, than offering a discount, should be explored before any other avenue.
One way would be to do an early focus on removing any waste in the AR processing system.
Another is to invoice more weekly. Perhaps weekly rather than monthly. In the full spirit of F;ow, you might even invoice as soon as the client has delivery. They might not pay immediately but you will at least catch their next payment cycle which could still be faster than present.
The opposite of Accounts Receivable is Accounts Payable; payments to your suppliers.
To keep your cashflow healthy you minimally want your cash collection to be faster than your cash payment to suppliers. Otherwise you are using your cash to pay for the bridge time between collection and payment. This cash can be otherwise used to grow your business.
Secondly, if you do pay promptly, you might be able to negotiate a discount for (e.g.) payment in seven days. Your supplier also needs cashflow so this might be attractive to them.
There is also a huge bankrolling opportunity by maximizing "free cashflow" for you if your business model permits. This means you get the cash from selling a product before you ship it and before you have to pay the supplier. Essentially your Accounts Receivable is zero and you have the use of that cash until you have to pay it to the suppliers. Several of the most successful companies in the world use their customer's money in this way to fund their growth. It can work with many businesses selling over the internet. Dell Computers receives your payment for a computer purchase at the time of ordering and you get it (say) a fortnight later. The suppliers of parts to Dell probably get paid 30 days after invoicing which might be a monthly cycle. This means Dell has your money for an average of 45 days before paying the suppliers. They can use what is effectively an interest-free bank loan to fund their growth. Amazon is famous for using free cashflow to the maximum and that has helped it grow to one of the biggest companies in the work. Amazon did not make a profit for many years (free cashflow will not increase your profit) but grew very rapidly on the back of your online payments for purchases.
Another long lasting boost to your business can be a growth in sales. In this section, we outline how such sales revenue growth might be speedily achieved.
By the time you reach this point in the DP100 Program, you may have used the 80/20 Rule (see The Amazing 80/20 Rule article) to identify the product range that you are going to keep on board. If not, go back to the article A2.3 DP100-Reduce Costs to do that step. Also refer to 80/20 To Double Sales and Triple Profit
We are not looking here at a calculated improvement in revenue over time, this is covered in more detail in our Redouble your Revenue in a Year article.
Here we talk of rapid changes actions leading to quick returns.
Focus on Best Customers First
Earlier in this article, we identified the best products to provide and the best locations to operate from. We have left it to this point to spend some time on identifying the best customers for you to work with as it was first necessary to work out what products and what locations we would be servicing.
At this point in our profit maximisation process, we could apply the 80/20 principle to our remaining customers after any products and locations have been removed; and possibly taking some customers with them. Losing any customer is painful but might be necessary to boost profit. Some might be held on to with different sales channels, for example, replacing face-to-face sales with cheaper online sales.
At this step, we want to apply the 80/20 analysis to all our remaining existing customers and rank them in their order of profitability. Note that we said profitability rather than sales volume because if a customer buys a lot of product but gets a very substantial discount for doing so, they can be less "profitable" to us than someone who buys less but pays more.
Once we have ranked the customers by sales profitability, we work down the list until we notice a significant drop off in the profit from customers below that point in the list. This is typically the 80% of profit that comes from 20% of customers above this point and the 20% of profit from the 80% of customers below this cutoff point.
That is not to say that we shouldn't focus on the ones that follow this cutoff but we certainly should be concentrating on the high profit ones and maximising the profit that we can make through them by seeing if we can increase our sales to them before we move on to a customer who is a comparatively small profit generator for us.
You can read more on this process in the 80/20 Sales Growth; Double Sales, Triple Profits article.
By this point, we now have an idea of what customers we want to sell which products.
The next step is to decide a pricing regime for these customers and for bringing on board other customers, including some of the ones that ranked low on the previous section on increasing sales volume. There is a separate article on pricing (see How 1% Price Increase can give 20% more Profit article).
A quick outtake from this is that an analysis of 1,200 businesses showed a 1% improvement in price would have averaged an 11% improvement in profit.
Improve Sales Funnel Flow
The term Sales Funnel refers to the flow of potential buyers though a sales & marketing program until they (hopefully) emerge as customers at the other end of the Funnel. (See Sales Funnel article).
But, because we are looking here for rapid improvement with the business you already have, the fastest way to improve sales is likely to be finding the TOC constraint in your Funnel and focusing your attention on that. See TOC and the Sales Funnel article for more information.
Over and Under Stocking
Over stocking products for sale and for input to your manufacturing cycle ties up money in inventory costs. Clearly, we should try to strip some of these out. We have discussed this in several places in DP100.
Perhaps even more insidious is the terrible profit damage that can be done when you run out of stock. These are often your best selling lines (which is why you run out) so not having them costs you sales.
Quick remedial actions outlined in our Over and Under Stocking article can plug this hole in your profit drain.
DP100 is divided into several articles to be more accessible for you. These are;
- A2.1 Introduction
- A2.2 Getting Ready - how to prepare
- A2.3 Cost Reduction - the fastest step so probably where you will start
- A2.4 Increase Revenue - without making many changes to what you presently have, it is likely you can increase revenue. Options are discussed here
- A2.5 Blue Belt - Advanced Profit Growth Techniques
All of Profit Savvy's resources are in a constant state of updating and expansion as new management insights become available.
You can revisit this Program at any time in the future to see if there is new inspiration to improving your business.
In any case, you might want to redo the DP100 Program every few years to scrape off any new 'barnacles' that might have become attached.