Improving Your Profitability

In today's economic environment, profitability is a key element in determining a company's health. Companies with industry-relative healthly margins during an economic downturn are well positioned for growth and even higher profitability in the future. Those on the other end of the spectrum, while they may survive an economic downturn, usually do so by the "skin of their teeth" and are quite possibly doomed to oblivion by future competitive pressures as the economy improves.

The Key To Profitability

The key to maximizing your company's profitability is micro-managing the elements that determine profitability, i.e., revenue and cost. To say that your company's communication costs are "X" dollars is of little value in increasing profitability. You want to know what those costs are not only on a per employee and a per department basis, but per other measureable factors also. You want to do the same with revenue, measuring it in per employee, per customer, per driver, per service offered, etc. Only after you are able to identify revenues and costs in this manner will you be able to effectively manage the factors they represent and improve margins.

How To Do It

The first thing you want to do is to identify your revenue sources. In identifying the revenue sources, not only do it by service/product, but separate ancillary charges (such as PODs, residential delivery charges, etc) from the total revenue number. When you finish you should have a base price for each service plus a variety of ancillary revenues for each service which will equal the total revenue you receive for that service. You'll want these figures later on to determine how you should go about increasing pricing if necessary and if your charges are actually covering your costs. You will also want to know the total number of shipments you've delivered in order to evaluate per shipment costs later on. One thing that is noteworthy is that you should also determine the number of packages in each shipment and keep that information for micro-managing your costs later. You may find out that multiple piece shipments are costing you significantly more than single piece shipments, effectively eroding any profit margin you may have for that service.

Now do the same for your costs. Don't just list "communications", but break it down further in terms of landlines, cell phones, text messaging, etc. The key is to identify all costs at their lowest possible level. A good way to examine both revenue and costs is via an Excel worksheet.

Measurement Is Critical

Now decide the measurement categories. They are typically per employee, customer, shipment, department, etc. There's no limit as to the number of categories you have, but you want to keep it manageable. Within each category you want to list a value for that category. As an example, if you have 20 employees, the value would be 20. In terms of shipments, you want to determine the number of shipments for an entire year and then break that number down further to monthly and weekly numbers. Just remember you need to use the same time period in your calculations---monthly revenue divided by total monthly shipments, etc. Initially you want to use the yearly calculations as your base number against which you can measure to determine whether you are improving or not. You also want to calculate activities for each of the past 13 months in order to have a reference to compare to.

Maximizing profitability means micro-managing all costs. Once you've completed and compared everything to this point, you will probably have identified some costs which you were not aware of and some costs which you did not realize were so high. Micro-managing allows you to attack those costs at minimum risk to your company. As an example, if you find your delivery costs are increasing, a simple way to remain at the desired area of profitability would be to raise overall prices. But that strategy rarely works as it implications of alienating customers and allowing competitive inroads into your accounts. By micro-managing you can identify exactly what is increasing your delivery costs and take appropriate in that area to put at risk only a portion of your customer base. You may find out that residential delivery costs are 2 - 3 times higher that non-residential delivery costs. The solution may be to have a residential delivery surcharge for any residential delivery. Keep in mind though that many customers don't like to be "nickled and dimed" to death. There's only so many ancillary charges you'll be able to charge before a customer looks elsewhere so don't be afraid to charge an additional charge in one area to compensate for costs in other areas.

Biggest Bang For The Buck

The biggest bang you'll generally get for the buck is in the area of automation. Payroll costs are generally the highest costs for a company and automation will reduce or keep at a constant (your decision) the number of employees you have. But automation will also increase employee productivity company-wide so there are some signigicant cost savings that can be achieved in this area also. But before you purchase, read "Before You Invest in Software" on this site.

© 2008 XPship