There is much to consider when presented with the challenge to increase
company profits. Many financial tools are available to help break down the numbers, and that’s a good place to start.
It’s natural to inspect the budget in
search of costs that, when reduced or
eliminated, drop directly to the bottom
line. But a number of key strategies for
profitability might be hiding in plain sight
within a company’s available resources —
resources that are not tracked on the typical financial statement.
“A budget is a basic financial tool, but it
doesn’t allow for nonfinancial assets or
resources,” says Mark Topel, partner,
Whitley Penn LLP in Fort Worth. “A budget
discussion among managers and employees, however, may generate solid solutions
to increase revenue or reduce expenses by
better utilizing company resources.”
Smart Business spoke with Topel about
how to improve the bottom line by discovering and tapping a company’s built-in
assets.
When should a company perform a profitability review?
A review should be performed on an
annual basis — not necessarily at the
end of the year or the beginning of the
next fiscal year — but at least once a
year. It’s a good time for managers to
assess if the company or the department
they oversee is optimizing all of its available resources.
How can managers identify and tap underutilized resources within the operation?
It’s easy for CFOs, controllers and
treasurers to get hung up on financial
statements and things that measure net
worth. But let’s look beyond those numbers, at the personnel. What different
skills or experiences do the employees
bring to the company on a daily basis?
It’s becoming apparent that employees
are really ‘leased’ at any point in time, so
they are a valuable resource that needs
to be maximized.
One way to maximize these assets is to plug personnel from a seasonal-type
department into other areas of the business. There may be some training time
for the employees to get up to speed in
the new department, but these people
may have a skill or a specialty they can
bring to the new area that maximizes the
overall profitability of the company. If
you look at a nonfinancial balance sheet,
these resources and assets become
apparent.
What neglected categories can be addressed
to increase profitability?
A lot of times, the best way to answer this
is to ask employees — from top to bottom,
bottom to top — this question. A retreat
that brings all the employees together
might yield 50 to 100 ideas. These suggestions can be ranked in order of priority, or
by which are easiest to accomplish, or
what’s going to make the biggest difference
to the company’s bottom line.
During one corporate brainstorming
session, the staff suggested that management hire an expert at buying and trading a certain commodity used in the production of their product. The company
was using a cost-plus system of sales,
with its sale price locked in at 110 percent of cost. The commodity buyer made
recommendations on the best time to
purchase the needed supply. So instead
of cost-plus pricing, a sale price was
established on the market at a certain
amount, but the company was buying
this commodity for much less, thus
increasing its margin. As a result of the
brainstorming, profitability increased
from 10 percent to between 30 percent
and 40 percent.
Can outsourcing increase profitability?
Generally speaking, companies will focus
on reducing expenses without necessarily
looking at ways to increase revenue. It may
make sense to move a low-skill process out
of the business to have it done at a lower
price and avoid the additional cost of payroll taxes and benefits.
But on the other hand, there may be
processes, skills and training that a department or company does very well; or space,
personnel, and equipment that could be
‘outsourced’ to other departments or businesses. This is where the change in mind-set from making decisions based solely on
financial statements, to making decisions
based on nonfinancial assets and
resources, can lead to profitability.
Can advisory boards impact profitability?
Yes. Usually the more ideas the better.
But rather than beginning with an advisory board of outside people, why not utilize
a board consisting of inside people who
know your business very well? Get their
input and ideas about how to improve
profitability. Reward these strategies
when they are implemented and succeed.
An outside advisory board is helpful when
you’ve taken your internal assets as far as
they can go.
MARK TOPEL is a partner with Whitley Penn LLP in Fort Worth.
Reach him at (817) 258-9130 or [email protected].
