The road to profitability might be lined with improved sales, but many companies often overlook cost containment opportunities as a way to make an immediate impact on cash flow and the bottom line.
In todays hectic business environment, organizations run lean. Workers are forced to perform more duties without adequate time or focus to review operations in a comprehensive manner. The status quo becomes the norm and only those initiatives directly related to sales growth are determined appropriate and receive attention.
However, for some proactive companies, outsourcing of activities or projects and even entire functions is increasingly common. These specialists are objective, thorough and can accomplish measurable results at lower priority.
While double-digit sales growth is important and always exciting, margin improvements should probably be a higher priority. With the proper focus and expertise, improving margins through cost reductions is often easier than maintaining a double-digit growth number and the effects to the bottom line are immediate.
Take, for example, a typical manufacturing company, which has revenues of $30 million and net profits of $2 million. Assuming a typical cost structure, a 10 percent sales increase ($3 million) may generate additional profits in excess of $200,000. Impressive numbers, but be aware of the costs to achieve the increase.
Less than a 2 percent reduction in the cost structure of the organization would achieve similar results.
If cost reduction initiatives affect the bottom line directly and more quickly than increased revenues, why are most priorities driven toward sales growth? Some might contend that costs are in line with industry averages or that cost cannot be reduced further without affecting quality, service and morale.
Others believe costs are part of doing business. Still others believe sales growth is what drives job growth. None are without merit, but it is critical to realize that sales growth, in the long run, must be profitable sales growth.
If sales are increasing but margins are not, this is not profitable growth and will have to be addressed, sometimes painfully and usually at the expense of future growth.
At the same time, if an organization achieves modest sales growth and costs (fixed and variable) are being reduced, the owners will be delighted because of the profit margin increases.
Profit margin improvement is not always easy, particularly today, when most organizations have been restructured, staffs are overloaded and internal expertise concentrates on customer satisfaction and revenue growth. Companies seeking to improve margins along with sales should:
- Avoid downsizing and invest in your employees. They are your No. 1 asset. Challenge them.
- Create teams to conduct assessments and develop profitable solutions. Competition is a marvelous motivator.
- Map the purchasing process, identify and correct the disconnects. Make sure adequate controls are in place.
- Create incentives for employees to eliminate waste, reduce costs and recommend cost saving ideas.
- Consider retaining an independent business adviser to provide an objective opinion and recommendations.
Mark Miller is president of Cost Control Systems of Ohio.