Day 4 – What Is Profit? How Do I Do More of That?

 Profit Is Far and Away the Most Important Marketing Secret – Ask Your Wife and Banker

A prospective client calls a while back: “I’m trying to decide whether or not to keep my business open.  My wife is getting tired of supporting my hobby.”

When we discuss the subject of Marketing, most business owners and their employees, managers, and even customers probably think marketing means things like advertising, store layout, packaging, product design, or distribution channels.  Actually, only the very astute think distribution channels.  Nobody counts profit and it’s negative twin, loss, as part of marketing.  But unless we make a profit, all of the good intentions, products, customer service, and promotion is eventually going to result in the doors being shuttered, and no one gets the benefit of all the good things you’ve done.

Have you seen your profit and loss statement lately?  Ever?  Do you know how to read it?  Do you understand how to analyze that P & L and optimize your business based on the information contained in that document?  Have you done regular inventories so that the P & L is accurate enough to provide you good data?  Do you take or spend money off books so that you can’t actually know the true results?

Recently I worked with a service business that was doing almost $500,000 in sales.  The owner was breaking even.  In less than 20 minutes I was able to tell her what needed to be done.  Two years later, after making nothing for her work, she decided to take my direction.  She was paying her manicurists a 60/40 split and paying their health insurance. Industry standard was more like 45/55 and no health insurance. We made the change, explaining to the staff that the store would have to close if we didn’t do so. They all stayed.  The company now yields $6000 a month in profit, and should move to about $9000.  Does your company have a gold mine just waiting to be taken to the bank?  Many, many companies do.

I recently wrote an article for Bicycle Dealer Magazine that laid out how a brick and mortar retailer should be able to take home $100,000 on sales of $800,000 (Email me if you’d like to see a copy of this article.  RandyKirk77@gmail.com).  Most retailers would be astounded by the assertion, and the truth is some retailers should do even better than that.

Profit is loosely defined as gross income less cost of goods and overhead.  Any analysis starts with the cost of goods.  What does it cost you to deliver the product or service to your client.  Is your cost of goods average or better compared to others in your industry?  Should you be buying better?  5% less cost on $500,000 in purchases is $25,000 a year.  Buying better might be worth some time and attention.

Selling price is another big issue.  Are you discounting too much?  Are you selling too many low margin items and not pushing higher margin items out with each sale.  Are your service employees pulling their weight.  In most cases you should be paying service workers 1/3 of the gross income from their effort.

If the cost of goods is in line, attack the overhead.  Take it line by line and wonder aloud if you could eliminate that cost if it was necessary to save your business from bankruptcy.  A consultant once helped me cut $175,000 in overhead per year. Until he stepped in I felt that all of those items were essential. I later followed his lead and reduced overhead by another $75,000.

So here is the dare for day 4. Go over your budget line by line. Assume that there is a way to cut each one. You may not actually do so, but what would you do if you had to? Call all service providers and find ways to cut cable, phone, internet, gas, electric.

Set aside a fund to be used for buying closeouts or taking advantage of big sales. Don’t be afraid to buy a years supply of a generic item if the discount justifies. You may be able create that fund by selling off old inventory that is just gathering dust at give-away prices. Put the money to work.

Now contemplate how you might add to gross margins on the sell side. Maybe you could pay commissions based on profit? How about having sales spiffs for selling highly profitable items? Consider offering cost-free ways to discount, such as guarantees or low cost ways such as labor.

Monitor your margins monthly. Possibly have a bonus set up if margin goals are met.

Attack profit through increased sales, increased margins, and a tight reign on overhead. And one final thought. Have your bookkeeper produce a profit and loss statement for you within 5 days of the end of the month. In 2015 there is no excuse for any bookkeeper not being able to do that, even if there are small adjustments in the future. Use this quick analysis to make changes in tactics or reevaluate goals and strategies.

If you would like to continue the 40-day challenge, please send me your email to RandyKirk77@gmail.com.  There is no cost or obligation. The rest of the 40 days will be done by email starting with Day one on January 6, 2014.  If you are reading this after January 10, let me know when you send the email, and I will send you the missed days.

 

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