Profitability from within Featured

7:00pm EDT January 31, 2007

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 Mark@wpcpa.com.