Last week I introduced our Profit Zone program. This week we’re going to take a closer look at the activities that the program focuses on.
The Profit Zone program has identified 9 activities that help you create and maintain profit. Part of the process of zeroing in on your profit zone is to help everyone understand these 9 activities and how they can affect them for the better. We’ll tackle the first 5 activities this week and the last 4 next week.
As I talk about these 9 activities, think in terms of application to your company.
#1: Revenue generation
It doesn’t necessarily follow that just because you drive a lot of revenue to your company that you will make money. However, you have to make money in order to have money to worry about. So the first activity in the Profit Zone is generating revenue.
There are only 3 ways to increase revenue in your company:
- Grow the number of customers.
- Increase the number of transactions.
- Increase the amount of the transaction.
Not all companies understand this concept. If you don’t have a way of attacking each of these drivers of revenue, you won’t be able to truly impact your profit as much as you could.
#2: Understand the strategic and tactical focus of the company
Everyone talks about creating a ‘strategic plan’ for your company. While that is important, without the focus to execute your plan, profits will remain elusive. As a part of the Profit Zone, this is one of the activities that most CEOs are the least confident about.
Anyone can come up with a plan – the challenge is to make it happen. If CEOs were as good at delivering on their plan as they are creating it, more companies would be in business today. Any number of things can occur that may make you second guess if you are on the right path. But as long as you have done your due diligence upfront, you need to remain confident in your decisions. You have to commit to the plan and stick with that plan to completion.
There is no way to be 100% certain that you’ve made the right choice, but you have to trust your instincts. Stay focused. Stay on target. You must remain confident in your plan. As soon as you lose confidence, that lack of confidence will filter down through the staff quickly. Without the support of your staff, even the best-laid plans will fail.
#3: Gross and Net Profit Margins
Does your staff understand the difference between how your company makes money and how your company keeps money? Are your financials set up to track each different revenue group? Meaning that you can look at your service or product offerings individually and see where you make the most money. Do you know what your cost of goods are for your services and products? This includes your direct labor, direct material, and allocated overhead costs. If you aren’t tracking your COG against your revenue groups this aspect of your Profit Zone is leaking money.
Most profit and loss sheets are not set up this way. In fact, most accounting programs aren’t supportive of this type of bookkeeping. But you should never rely on a software program to determine how you want to track your money. Set up excel spreadsheets if necessary and make sure you know where you make the best margins.
It’s a basic fact, if you understand what services or products make you the most money, you can make better decisions on how to spend your limited resources. Get this nailed as quickly as possible. Know where you make the best money. And work on making those margins even better.
#4: Cash Flow
This is the relationship between when money comes in and when it goes out. It’s a snapshot in time. And you should be tracking it daily or weekly, depending upon how long you have been in business and how sophisticated your accounting software is.
Put simply, cash is king. Never doubt that. And never lose sight of the fact that many companies have gone out of business even with a strong revenue stream.
Cash flow becomes extremely important as a Profit Zone activity when you can engage managers in understanding how cash flows in and out of your business. You need to help them understand the difference between being able to afford something and actually having the cash available that is necessary to purchase it. Sales made do not equal cash in hand. Making sure your key employees understand the importance of cash flow and how it differs from income is a huge step in educating and engaging your staff in the management of your company.
#5: Cost Structure
Earlier we talked about gross and net profit and the value of tracking your revenue groups with their cost of goods. Cost of goods helps you calculate how you make money. The cost structure of your company helps you know where you can keep money.
The question is, what does it cost you to run your business? You have to have a pulse on how much it truly costs you to make your product or provide your service. Including both fixed and variable costs. Is there any way you can change the ratio between your variable and fixed costs? Or could you look to lower either of them?
This knowledge will help you better understand how you can change your cost structure and ultimately improve your margins.
The Profit Zone is about education.
When we talk about the Profit Zone, our goal is to provide you with information that can help you educate and engage the rest of your staff in how you run your business. A lot of employees may believe that you make a huge salary and assume that you also walk away with all the profits as a bonus at the end of the year.
Once your staff begins to understand what it really takes to run a business, that is showing them where the money goes that comes in, those misinformed assumptions will start to disappear. Their understanding of how much the company makes will begin to get into alignment with what you already know. There isn’t a lot of profit. The little that there is, is hard to get. And keeping it is even harder.
So explaining and sharing with your staff your company’s budget, educating them on what a profit and loss statement looks like, why a balance sheet is important, and what things cost is a huge step in the right direction for any company looking to capture more profit.
Tune in next week for the next four activities that make up your company’s Profit Zone.
Written in part by Laurie Taylor of Flashpoint! LLC with edits and additions by Clay Eure.