Pay Attention………… to the power behind the number 1!
I remember my 5th Grade teacher, Mrs. Duff, telling us “Pay Attention”, several times a day! Not to me of course, I was an angel……..eh-hem!
But yeah, paying attention is drilled into us at a very young age. As we grow older we all know that we should pay attention, and for the most part we think we do. But in reality most of us glaze over and forget to drill down to the basics, either because we are not aware or because we don’t have the time. But not paying attention to the basics can be detrimental over time and often leads to failure.
For the foundation of this post I’m going to go back into my banking years and dig through my “cache”. Because helping you put more “cash” in your pocket is my goal. Ok, ok enough of being corny!
If asked, most business owners would say the number one thing they pay attention to is profit margins. Ok………..that’s good, but just how are you paying attention? How are you managing your profit margins? Some popular answers are;
Reduce Labor costs.
Reduce Operating Expense.
The average small business would have to increase sales volume by 19% overall to offset just a 5% discount. Accordingly, a 38% increase in overall sales on a 10% discount, etc., etc. A strategy based on cutting prices to increase volumes, and as a result, to raise profits is generally doomed to failure in almost every market and industry.
Here’s a novel idea, RAISE your price!
OOOH yes I did, I went there!
A recent McKinsey Group study of 1200 typical small businesses across all industries shows raising price just 1%, can result in a 8% increase in operating profit.
As you can see on the left a 1% or $1 increase, on a $100 sale can increase operating profit by 8%, mainly because variable and fixed costs remain the same, whether your price is $100 or $101. So you’re keeping more of that 1 dollar than the previous 100 dollars.
Raising your price 1% is not a popular thing to do. But the truth is most business owners are more conscious of price than the customer is. Owners can justify any price of any kind, just by impressing the value of buying from you. Price should never be an issue.
Now let’s jump back and look at the components we listed earlier. The McKinsey study shows that a 1% reduction in cost of goods can result in as much as a 8% increase in profit margins
“Well how the heck can I do that,” you ask. That my friend requires even more drill down. Under your cost of goods you must pay attention to leakage. Leakages are factors such as:
Cost of Carrying Accounts Receivable
Co-op Advertising allowances for a franchise
Factory/merchant rebate share programs
Employee Sales Incentives
Customer Comps and special spot discounts
Fixed costs are more hands on and specific per business and location. But keeping a good handle on all the components that comprise fixed expense most owners find it very easy to reduce the fixed costs by 1%. Some studies show a 1% reduction in fixed costs can equal up to a 3% increase in profit margin.
Inventory management and control is another key component to paying attention. This single aspect is vital to the health and profitability of a small business. When I was a commercial banker, this was the number one cause of business failure in Northern Wisconsin.
Knowing your fastest and slowest movers and monitoring their store levels at any given time is essential. It prohibits over stock and under stock and allows you to drill down and only incur the expense of cost of goods when and if it is necessary. Managing inventory helps both on the pricing side and expense side of calculating your profit margin. Let’s say you’re ready to embrace that 1% increase in price. You may not want to increase your fast movers by that 1%, but you may want to increase your slow movers by 5%. As long as your overall balance is at or around 1%, you should easily attain your 8% increase in profit margin.
The last thing I will touch on is Improving Efficiencies. This is probably the most difficult to monetize, because every business is different. So the best thing I can do is go through an example of a real client of mine. This is a supper club, who had been a client of mine for about 2 years at this point. And as I often do, when I’m in the neighborhood I will stop in just to see how things are going. On this particular day she seemed very agitated and frazzled. When I asked her what was happening, her response was “efficiency around here is terrible, and no matter how hard I try I can never seem to get there”.
I prodded her to be more specific she started with:
Food Spoilage/waste and over pours at the bar are killing me.
Wait staff morale is low because there is such a bottleneck getting orders in, finalizing tables etc. And cook staff morale is poor because wait staff holds orders and then floods the kitchen, or cooks can’t read orders. Orders are wrong or inaccurate leading to upset customers.
In the case of my client, we set her up with a new cloud based POS driven by downloadable free APPS. Her total investment was $3500.00. Within 2 months she had freed up over 60 hours per month that she was spending on accounting and employee scheduling. With inventory management she reduced her food waste and over pours and customer comps by 25%. The wait staff and kitchen increased efficiency by as much as 50% with mobile tablets ordering at the table and sending printed orders directly to kitchen. Her wait staff saw a 20% increase in tips because they could spend more time with the customer’s, and over all covers increased 20%.
After her first year of her $3500.00 investment she realized a $32,000 increase in profit a 10% increase over all. Can’t afford it? You can’t afford not to embrace the technology we have available to us today. The moral of the story, pay attention to technology and look to it to improve efficiency.
In summary, can you see how you can use the number 1. Use this number and pay attention to what it can do for you. In the examples used within this writing we increase profit margins 41%, just by using 1.
Put this theory to use and post on my facebook page; Rick Montgomery/Northern Air Merchant Services let me know how 1 impacted your business.