When companies want to become more profitable, the first place they look it at their sales process, salespeople sales managers and their CRM system. Even though that’s a great place to start, your company’s bottom line isn’t as closely tied to sales as most people would think.
For the average company, every $20 that’s spent requires a $100 sale. And the average company can trim down costs considerably by looking at its top three expense categories.
Here’s what our clients have shared: one client had cost of goods sold as their biggest expense.
When they looked at what they were buying they were able to negotiate annual purchase agreements with three vendors that saved them 27k in the first year that they implemented annual purchase agreements.
Another client shared that their company analyzed manpower costs and changed their hiring policies to limit temporary help to no more than 3 weeks per position, and expanding their full time staff instead, saving 38k in the first year of operations.
When a growing company makes just a few small changes, the results are often pretty remarkable
Especially when that savings can be used to offset the cost of something else that the company needs but believes they cannot afford.
It’s almost never about the company’s gross sales. It’s certainly advantageous to make sure that sales are increasing; but it’s also important that the profit margin makes sense. What this means is: that if we look at any sale, the gross profit must generally exceed your company’s overhead and a bottom line margin of profit.
Yes, exceptions are sometimes made but those exceptions need to be reviewed and approved by owners and management. Some companies will base their salespeople’s compensation/ commissions on their gross margin rather than sales for this very issue.
As you can see, keeping everything in balance is a complex issue. Many companies have complex BI (Business Intelligence) systems in place for exactly this issue.; and these systems can report on KPIs (Key Performance Indicators) specific to their company and/ or industry. But all these KPIs were developed by first looking at the company data, because the data tells the story of how well each company utilizes what they have and how much they accomplish with each expenditure that they make.
Company culture being what it is, some companies value their employees above all else. They might even pay more than the going rate and could be especially generous about vacations and holidays, because they value loyalty and a low turnover rate. On the surface, they are spending more for this line item but save in ways that are less tangible.
Other companies might hold the products that they sell above all else, and for some companies that might initially mean a smaller gross profit, but if they keep their overhead costs low they can easily offset this. Other company cultures value their service above all else, which is both highly desirable and probably has a very positive effect on their bottom line because great service is something every customer and client wants to receive.
Obviously, not every strategy works for every company, but there is a hierarchy to this process.
If you are the new CFO, that hierarchy might look something like this:
- Define what the company culture looks like and which expenditures are most likely more sacred than others. These expenses get the lightest touch, but should still be well managed. If their employees top the list, then HR needs to be at the top of their game, and the company’s managers need to have solid plans to get the most out of these valuable assets. If the company culture values its products above all else, then the purchasing manager needs to be on top of his/ her ordering and or negotiating skills. Pricing is often based on sales volumes, so the sales manager will also participate in this instance.
- Once you’ve completed the first step, then review the remaining expenses that you potentially have some influence over, and you can look at the top three remaining expense categories. Depending on what the expenses are, you need to do a bit of research on how these products or services are purchased or contracted for. Many products and services that are purchased repetitively can be negotiated based on an annual volume rate, or competitively priced with multiple vendors. Even if your preferred vendor isn’t the best price, you can potentially use your best offer as a bargaining point.
If this sounds like your company, or you’d like to discuss other challenges around keeping more of the money you make remember: it’s not what you earn, it’s how much you keep that matters. If you’d like to discuss this further send me a message through our contact us page and let’s talk.