Hidden Elements That May Be Draining Your Company’s Bottom Line
you’re a business owner, an executive, a manager, or even an entry
level employee, you know that the bottom line is important to your
company’s future. After all, if the company doesn’t have a healthy
enough bottom line, you probably won’t have a job with that
organization for very long.
some people believe that in the business world, “profit” is a
dirty word. Realize, though, that profit is a good thing for any
business, and is the reason why that company exists. Even if you’re
a consumer, you want the companies you do business with to make a
healthy profit, because that means they’re going to be around when
you need them.
people know the simple equation of “sales – expenses = profit,”
few people realize that creating a healthy bottom line for an
organization actually goes way beyond this. In fact, true
profitability for any company requires that you focus on five key
elements. Failure to adequately monitor any one item could quickly eat
away at your company’s bottom line, causing you and your staff to
work harder than necessary just to stay afloat.
The Five Keys to Profitability
Revenue (sales) – One of the most important aspects of revenue
is knowing which products or services are the most profitable, and
then focusing your efforts on those items to increase your company’s
the more sales you bring in, the better your bottom line will look.
But simply selling more may not be the only solution. Depending on the
market you’re in, it may be wiser to raise your prices, even if it
means you’ll sell fewer products or services. For example, if
you’re too busy and can’t keep up with customer demand, that may
be an indication that you need to raise your prices. While you could
continue to sell lots of products or services for the less expensive
price, if you can’t adequately service those customers, then they
may get fed up and leave you for a company that can, even if it means
paying a bit more.
flip side, in order to increase revenue, you may need to lower your
prices, especially if you’re trying to enter a new market or attract
a new type of client. Another option is to “bundle” products or
services together into one new item to give consumers a deal they
simply can’t refuse.
2. Expenses – When it comes to showing more profit, cutting
expenses is usually the first thing business people try to do.
Unfortunately, when it comes to cutting costs, most business people
don’t consider the cost itself. They don’t analyze whether the
cost is an essential cost or a discretionary cost.
costs are those things that don’t fluctuate and that you can’t
change, such as the cost of rent, the cost of the furniture you
bought, or the cost of payroll for key personnel. Discretionary costs
are those things that can fluctuate and that you have some control
over, such as the cost for payroll for temporary staff, the cost of
non-essential office services, or the cost of marketing initiatives.
when it comes to cutting expenses, sales and marketing expenses are
the first to go. But this is a huge mistake. Cutting the one thing
that will ultimately bring in more revenue simply doesn’t make
sense. Rather, go after those expenses that are discretionary and that
don’t impact the future.
3. Investments (capital for major expenditures) – Any money you
put back into the company, or money you get from other people (banks
or investors), is what fuels your future. In fact, if you don’t
infuse money into your operations somehow, you’re not going to be
able to grow as a company. At best, you’ll be stagnant; at worst
you’ll be out of business.
could mean buying new equipment, a bigger building, or new technology.
Or, depending on your industry, it could mean, investing the time to
creating a new product or service. Think of investments as anything
with a longer-term impact. Failing to invest in your company may not
impact your bottom line today or even this year, but it definitely
will impact it down the road.
4. Losses – The real losses to be looking for are those subtle
losses that silently erode the bottom line. This could include the
wasting of resources or raw materials, people not being productive during work time, and merchandise mysteriously “walking out the door.” A major loss that many people
overlook is turnover. Not
only do you lose the talent, but you also lose time and money as you
recruit and train a replacement.
the worst loss of all is the loss of customers. When you lose
customers you lose the immediate revenue, as well as future revenue
that person would have brought in. Additionally, you lose revenue from
any referrals that customer could have given you.
5. Risk – When taking on new work or projects, most companies
don’t assess the risk associated with the new project properly.
Likewise, when they get ideas for a new product or service, they get
involved in the emotional aspect of the idea and don’t do a risk
analysis. They don’t understand the potential losses, the required
capital investment, or the real expenses. They get enamored with the
revenue and fail to pay attention to the other parts of the equation.
to know if any new venture, project, product, or service is a good
risk for your company, you must ask some key questions:
Does this new endeavor have a high market potential?
Does this new endeavor enable us to work with people who
know our capabilities?
Does this new endeavor have low competition?
Do we have the financial resources to handle this new
Do we have the necessary staff to properly deliver this
Does this new endeavor work within our existing
“yes” answers you can honestly give, the lower your company’s
risk and the better it is for your bottom line.
Focus on the Real Keys to Profitability: When you’re talking about
improving your bottom line, you need to go beyond just income and
expenses. While focusing only on income and expenses may give you some
short term gains, simply selling more or cutting costs will not enable
you to remain competitive for the long term.
get a true idea of your company’s profitability, you must look at
the whole picture on a consistent basis. By focusing on all five key
elements—revenue, expenses, investments, losses, and risk—you have
the needed opportunities to make your bottom line the best it can be.
Read other articles and learn more
about Marsha Lindquist.
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