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The Five Hidden Elements That May Be Draining Your Company’s Bottom Line Whether you’re a business owner, an executive, a manager, or even an entry level employee, you know that the bottom line is important to your company’s future. After all, if the company doesn’t have a healthy enough bottom line (a.k.a.: profit), you probably won’t have a job with that organization for very long. Unfortunately, some people believe that in the business world, “profit” is a dirty word. They think that businesses today make too much profit, and some may even go so far as to try to cut into the company’s profit margins. Realize, though, that profit is a good thing for any business, and is the reason why that company exists. Even if you’re a consumer, you want the companies you do business with to make a healthy profit, because that means they’re going to be around when you need them. Since you likely want every business you have interactions with to be viable, you must accept the fact that profit is what makes that possible. While most people know the simple equation of “sales – expenses = profit,” few people realize that creating a healthy bottom line for an organization actually goes way beyond this. In fact, true profitability for any company requires that you focus on five key elements. Failure to adequately monitor any one item could quickly eat away at your company’s bottom line, causing you and your staff to work harder than necessary just to stay afloat. The Five Keys to Profitability In order for your business to stay profitable, you must monitor the following five elements. 1. Revenue (sales) One of the most important aspects of revenue is knowing which products or services are the most profitable, and then focusing your efforts on those items to increase your company’s revenue. If you don’t know what each item’s line profitability is, then you must determine that immediately. Obviously, the more sales you bring in, the better your bottom line will look. But simply selling more may not be the only solution. Depending on the market you’re in, it may be wiser to raise your prices, even if it means you’ll sell fewer products or services. For example, if you’re too busy and can’t keep up with customer demand, that may be an indication that you need to raise your prices. While you could continue to sell lots of products or services for the less expensive price, if you can’t adequately service those customers, then they may get fed up and leave you for a company that can, even if it means paying a bit more. In this case, failure to raise prices will significantly hurt your future revenue potential. On the flip side, in order to increase revenue, you may need to lower your prices, especially if you’re trying to enter a new market or attract a new type of client. Another option is to “bundle” products or services together into one new item to give consumers a deal they simply can’t refuse. While lowering prices to increase revenue may seem like an oxymoron, in this case it may be the only way to get new markets to take a chance on your offering, which will then increase your revenue later. 2. Expenses When it comes to showing more profit, cutting expenses is usually the first thing business people try to do. Why? Because it’s an easy way to make the bottom line look bigger. Unfortunately, when it comes to cutting costs, most business people don’t consider the cost itself. They don’t analyze whether the cost is an essential cost or a discretionary cost. Essential costs are those things that don’t fluctuate and that you can’t change, such as the cost of rent, the cost of the furniture you bought, or the cost of payroll for key personnel. Discretionary costs are those things that can fluctuate and that you have some control over, such as the cost for payroll for temporary staff, the cost of non-essential office services (cleaning services, water delivery, long-distance carrier), or the cost of marketing initiatives. Typically, when it comes to cutting expenses, sales and marketing expenses are the first to go. But this is a huge mistake. Even though sales and marketing costs may be discretionary, they are the lifeline of any business. Cutting the one thing that will ultimately bring in more revenue simply doesn’t make sense. Rather, go after those expenses that are discretionary and that don’t impact the future. Additionally, don’t assume you can’t make changes to essential costs. Sometimes you have an essential cost but you can get out of it (such as by subletting some office space or selling off some non-essential equipment). Cutting the wrong kind of cost will ultimately hurt your bottom line. 3. Investments (capital for major expenditures) Any money you put back into the company, or money you get from other people (banks or investors), is what fuels your future. In fact, if you don’t infuse money into your operations somehow, you’re not going to be able to grow as a company. At best, you’ll be stagnant; at worst you’ll be out of business. Investments could mean buying new equipment, a bigger building, or new technology. Or, depending on your industry, it could mean, investing the time to creating a new product or service. Think of investments as anything with a longer-term impact. Failing to invest in your company may not impact your bottom line today or even this year, but it definitely will impact it down the road. That’s why you must plan for investments from the very beginning. 4. Losses When we think of losses, we typically think of money losses. But the real losses to be looking for are those subtle losses that silently erode the bottom line. This could include the wasting of resources or raw materials, people not being productive and “goofing off” during work time, and merchandise mysteriously “walking out the door.” A major loss that many people overlook is turnover, because not only do you lose the talent, but you also lose time and money as you recruit and train a replacement. Perhaps the worst loss of all (and the one that has the most immediate impact on your bottom line) is the loss of customers. When you lose customers you lose the immediate revenue, as well as future revenue that person would have brought in. Additionally, you lose revenue from any referrals that customer could have given you. In the end, all these losses have the biggest impact on your ability to generate revenue and create a healthy bottom line. 5. Risk When taking on new work or projects, most companies don’t assess the risk associated with the new project properly. While they know any new work will bring in money, they don’t ask if the project is going to ultimately help the company. Likewise, when they get ideas for a new product or service, they get involved in the emotional aspect of the idea and don’t do a risk analysis. They don’t understand the potential losses, the required capital investment, or the real expenses. They get enamored with the revenue and fail to pay attention to the other parts of the equation. In order to know if any new venture, project, product, or service is a good risk for your company, you must ask some key questions:
The more “yes” answers you can honestly give, the lower your company’s risk and the better it is for your bottom line. Focus on the Real Keys to Profitability When you’re talking about improving your bottom line, you need to go beyond just income and expenses. While focusing only on income and expenses may give you some short term gains, simply selling more or cutting costs will not enable you to remain competitive for the long term. Realize that each of these five elements is intertwined, so you can’t look at any one by itself and decide that’s the way to enhance the bottom line. In order get a true idea of your company’s profitability, you must look at the whole picture on a consistent basis. By focusing on all five key elements—revenue, expenses, investments, losses, and risk—you have the needed opportunities to make your bottom line the best it can be. About the Author Marsha Lindquist, a business strategist for over 15 years, draws on her proven “down in the trenches” experience, creativity, and participative manner to provide real solutions to businesses to assist them in building and growing their businesses. She is an energetic presenter and is also the Chief Executive Officer of The Management Link, Inc. As well as being the author of “Why Are You Still Working Your A** Off?”, she has written and published several professional journal articles on business strategy and negotiations. She can be reached by E-mail at marsha@marshalindquist.com. |
