A few weeks ago I spoke to the Professional Association of Consulting Engineers on “Unorthodox Strategies to Improve Profit in Business”. It was a great group of people and they had some interesting responses to some of the questions that were discussed. But just like every other business owner, financial management isn’t their passion; engineering is. But they know that learning about how to improve financial performance in their business is critical to their long term success.
Why Unorthodox Strategies? Unorthodox means breaking with tradition or doing something that everybody else isn’t doing. 80% to 85% of small businesses (those under $20 million in revenue) don’t utilize these strategies on a regular and/or consistent basis.
Unorthodox Strategy #1. Set a Profit Target
Most business owners don’t take the time to set annual or monthly profit targets. The probability of hitting a target is much greater if there is one. So establish a profit target for the year and work towards that goal every month.
Unorthodox Strategy 2. Benchmark Your Company Regularly
A bank was worried about the performance of a customer. They were doing well on the revenue side; but were not making the money they should have been. After I did a benchmarking study of the client, I found that businesses in their industry were making $700k more a year than they were. They had pricing formulas out of kilter with the market.
Unorthodox Strategy #3. Your Business & the 3 Legged Stool
A 3-legged stool had great economic importance to large dairy farmers until the early 1950′s. It was an asset that allowed the farmer to milk many cows without tiring (can you imagine milking for 15 or 20 minutes on one cow without sitting?). For the 3-legged stool to be effective, it has to be strong, strong legs with a strong seat and the legs connected securely to the seat. It takes all four components to have an effective, strong stool.
Can you image how the farmer would act if just one of these legs was weak or brittle? He would be worried about falling down while doing his job of milking the cow – not a pleasant thought. So it is very important that the farmer be confident that all components of his tool are strong. He can depend on it and it gives him peace of mind.
Now allow me to explain how the 3-legged stool is structured just like a business. The four primary functions of the business are:
1) Marketing & Sales – without sales a business is dead and marketing is the precursor of revenue generation.
2) The Product or Service Provided by the company – if you don’t have a good service or product to provide to customers, the business is doomed.
3) Finance – money is the lubricant that keeps the business machine running – a machine that is well lubricated – will run forever with fewer problems.
4) The Seat of the Stool – that is management, the component that keeps the 3 primary legs of the business together: 1) sales/marketing, 2) product or service and 3) finance. The better these three legs, then the stronger the business and the greater likelihood the business can grow and maximize its potential.
Unorthodox Strategy #4. Setting and Managing to Your Profit Target
Understanding profitability is probably the most overlooked aspect of business management. Profitability is one of the primary keys to business success and the ingredient that funds growth, value and retirement benefits. The accounting profession isn’t helpful in helping business owners understand this aspect either.
Why profit is critical to a company?
Builds equity, which enables a business to increase leverage (if they want to)
Pays down debt
Increases cash in the company
Provides stability for the employees
Peace of mind for the managers and shareholders
Managing to your profit target is relatively easy, it just takes a little time do to it. Once you have established your annual profit target; assuming you have created a budget with revenue, cost of goods, gross profit and operating expenses to get to your net profit before taxes and you have created this by month; based on your historic revenue trends; you have a document that you can compare with every month.
Every month evaluate your monthly actual profit with your planned or budgeted profit and go from there. It if it goes over, great, if it is under, then find out what happened and take corrective action so that it won’t happen again.
Unorthodox Strategy #5. Financial Statements
Financial statements are the cornerstone of business financial management. These are black and white, non emotional, documents of what has happened in your organization over the last period (month or year). Make sure that your financial statements are:
Timely – you need to see these by the 15th to 20th of the following month
Accrual – make sure your financial statements are on the accrual basis that matches revenue and expenses in the same period. Cash statements do not measure profitability because they don’t look at income and expenses in the same period.
Consistent format – don’t let someone change your format without really good reason.
Unorthodox Strategy #6. Know Your Magic Number
Your magic number is where your company transitions between a loss and a profit; it is your break even point. This is the point where your company becomes profitable. It is critical to know this number because it is where you have to manage PAST each month. In most businesses, once break even is attained, profit can dramatically accelerate. Small business owners know where their break even point is and what to do to get past that each month. Business millionaires are made by just knowing this number.
As I indicated to the group of professional engineers, doing all of these unorthodox strategies will accelerate your businesses financial performance as well as increase your personal net worth.
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
Learn each of the next 6 unorthodox strategies in the Business Growth Workshop beginning September 20. Call 765-644-8887 for more info.