3 Ways To Maximize Your Margins
The common phrase “There’s strength in numbers” is a time-tested proverb that speaks to the value and advantage of having a well-stocked team or vast physical presence. However, in business, the phrase has a slightly different meaning. A business’ “numbers” decode the financial aspects and are metrics that serve as indicators of the health of a business. Financial information, like net and gross profit margins, should be a part of every business owner’s dashboard. Visibility to this information highlights blind spots that may be impacting the efficacy of the business. Furthermore, specific industries have market-driven benchmarks, which serve as indicators of how the business may be performing against the competition. There’s strength in the numbers, but there’s also truth. When margins are slim and underperforming, the cause is typically related to one or a combination of factors. Here are three approaches business owners can take to ensure they are maximizing their margins.
Implement Systems and Processes
While often used interchangeably, systems and processes are closely related, but two very different things. A business system is a set of concepts or parts needed to work together to execute a specific process. A business process is a series of actionable tasks within a system that yields a specific desired result.
First, begin by defining the core functions of your business. The core functions are the collection of each activity that is critical to your business’ existence. These core functions represent your business systems, with outputs of either a qualitative or quantitative nature. For example, let’s take a restaurant. Core functions (or systems) may include procurement, food preparation, safety, and hospitality (customer service). A quantitative output might be the amount of non-perishable food prepared and proportioned to meet anticipated demand for the next business day.
Within each business system, business processes define step-by-step methods required to produce a specific result. A business process within the food preparation system may be vegetable chopping. The vegetable chopping process would detail the series of tasks necessary to produce the quantity of the specific vegetables, chopped with a julienne cut, and stored in an aluminum bin at 5 °C.
Systems and processes are the bricks used to construct your business’ infrastructure. They support business longevity, breed consistency and promote scalability. The value in this implementation is recognized in decreased costs, increased productivity, greater efficiency and, you guessed it, increased profit margins.
Unaddressed inefficiencies will slowly suck the life out of your business. Shifting focus from “getting the job done” to “getting the job done properly” can result in significant bottom-line improvements. Efficiency has three primary measures: output, time, and productivity.
Begin by monitoring and measuring your core business functions against the three factors:
How much are you able to produce in one iteration?
How long does it take to complete one iteration of said function?
How many people does it take to produce consistent output within said function?
Tracking and analyzing these measures over time enables the business owner to identify performance trends. Dive deep into the process. Identify the inefficiency culprits causing the performance dips. Then, eliminate.
Eliminating process steps, dependencies and/or resources may cause temporary pain as the business adjusts to change. However, the long-term efficiency increases will pay returns in labor costs and time, which have a direct impact on your profitability.
One of the most difficult things to do in business is to cut costs. Costs are often tied to people we care about or to “nice-to-have” luxuries, to which we’ve become accustomed. However, maximizing your margins calls for a prudent look at current expenses. Distinguishing value drivers from profit parasites will highlight your greatest opportunities to reduce overhead. Through analysis and audit of both financials and systems, business owners are empowered to make decisions that can change their profit trajectory.
In analyzing the financials, one might ask: Is there an opportunity to renegotiate vendor agreements? Are we consuming everything that we procure? Or, is there waste? Could we be using less energy? Are we paying too much for our space? Do we really need a backlit automatic water dispenser? Are we getting the desired return on our marketing investment?
A regular audit of a business’ systems may raise the following questions: Can I produce the same output with fewer people? Fewer or different raw materials? Are there process steps that can be eliminated without sacrificing product or service quality?
These questions scratch the surface of what can be truly uncovered. However, answering these questions and committing to a comprehensive plan of action will blaze the trail to a sexier bottom line. While the process of cutting costs can be painful, the benefit to the business is priceless.
Working in business is a major challenge in and of itself. It’s beyond difficult to juggle the never-ending issues and still meet the needs of your customers day-to-day. However, failing to take the time to work on the business can neutralize even your best efforts. The value of a streamlined, efficient operation boosts the bottom line and creates far-reaching value. Developing an action plan around these three steps will not only maximize your margins but also reposition your business for sustainable, scalable growth.