Improving profits

It must be based on technical and tactical implementations

Granted, these are trying times. The global financial crisis, by any other name, would sound as bleak. Chin up, for there is still hope. In this period of economic despair, how would you like to improve your profits?

Against the tide of popular opinion, this is indeed possible. First, begin by training your focus on critical aspects such as quality and speed of delivery, and customer service.

Then, ensure profitable products are sold to profitable customers and recognise the need to identify and implement value creation in all processes.

Simple enough? Hardly. Did you know, 20%-35% of your organisation’s total costs are represented by work for which the customer derives little or no benefit?

The key imperatives to improve profits are: improve work efficiency and not merely reducing payroll; sell profitable products and services and find and retain profitable customers.

At the first sign of problems, you would most likely seek swift, corrective action which will help cut certain costs in the short term (“quick fix”).

But beware, lean and mean is not necessarily effective in the long term, because it attempts to reduce costs by reducing payroll, but it does not reduce the work that needs to be done to make and sell products.

While cutting payroll, but not work, is a popular approach to traditional cost reduction, it causes an immediate decrease in costs that is usually followed by an increase thereafter because the work still needs to be done (more costly in the long-term).

However, there are short-term quick fixes which can be effective. These may include setting much tougher budgets and “stretched” targets, demand higher returns on all assets and negotiating with suppliers by tightening competitive quotation procedures.

Let’s turn our attention to restructuring. Restructuring reduces the scale of operations to realign costs with lower (more realistic) levels of sales and margins:

·Cutting unprofitable markets, product lines and business units;

·Cutting management layers and driving managers harder by offering large bonuses based on the achievement of more aggressive targets;

·Stripping the business back to its core activities and selling off or outsourcing the rest; and

·Combining forces with other companies (for example: acquisitions, mergers and strategic partnerships) and looking for substantial cost savings.

However, in spite of all these measures, restructuring programmes do not address long-term strategies.

Generally, accounting systems are not designed to consider added value and this places managers in a quandary – they don’t know which costs to control.

You must re-analyse budgets to factor in the costs of work done. This would show the costs of activities which add value for the customer and costs of unnecessary work.

You must trim unnecessary cost components which are not adding value to the organisation. A large sales volume does not necessarily mean a large profit, as one retailer, Wal Mart, discovered from past experience.

Wal Mart’s pride was stocking extensive lines of merchandise. Each year, sales volume increased. This increase was attributed to good merchandise which Wal Mart felt took care of the steady rise in expenses.

But Wal Mart began to have doubts when it found it necessary to get bank financing more often than had been the practice. When the problem was discussed with its banker, Wal Mart was advised to check expenses.

As the banker said, “A large and increasing sales volume often creates the appearance of prosperity while indirect expenses are eroding the profit.”

As organisations review their competitive strategies, they are increasingly looking to consolidate core competencies and place non-core activities in the hands of external suppliers and service providers.

This in turn leads to the employment of large numbers of subcontractors who are extremely costly to manage and internal departments which are less efficient.

Cost savings are not always what they appear to be. The implication of such “hidden traps” is that you must make sure the outsourcing contract covers the whole process and does not simply replace the department’s budgetary costs.

In short, an effective management control system is a system that links market-based strategies with operations. The components are as follows:

·Externally focused with market-driven targets;

·Strategy deployment driving direction and improvement;

·Focus on the outputs and effectiveness of processes and activities;

·Resource planning based on rational cost:value relationships of activities;

·A relevant set of performance measures;

·Simplified, flexible and responsive structures;

·Communications, teamwork and involvement; and

·Motivation based.

Improving profits must be based on the approach of an organised programme consisting of technical and tactical implementations.

The former has been broadly outlined and discussed in terms of value adding and operational efficiency. The latter involves up skilling, training and most importantly the development of the “human assets” in line with the new direction of managing business.

- THE STAR