Everyone from the CEO of a Fortune 500 company to an entrepreneur to a high school kid with a part time job can testify that there are many ways businesses lose profits. But the challenge for the business owner or the manager leading a team is to figure out where to look for that lost profit potential.
Sure, you know you can either increase revenue or cut costs, but that doesn’t offer much practical help. I recently met with my team of managers to talk about where to look for opportunities to increase profitability. I focused on the expense side of the profit equation since every department can do its part to run efficiently.
Here’s how to get started finding that lost profit.
How does it scale?
You’ll find the most potential in expenses that scale rapidly. Some expenses, like health insurance, scale with each employee. Others scale with each order, or in the case of MakeStickers, per square inch of stickers sold.
Some expenses are relatively fixed. For some companies, rent and utilities are relatively fixed, that is, they don’t go up or down as the volume of business goes up and down, at least within a certain range.
So think about cost savings that will scale. In the case of my company, we print and ship high quality custom stickers. A small reduction in material costs or in material waste can have a huge impact over time.
What’s the maximum possible impact
You’ll need to get numbers for this exercise, but it’s pretty simple. Before you think about how you can reduce a certain cost, just think about what’s the most you could possibly save? If you don’t know, just guess.
For example, health insurance costs are high and pretty rapidly increasing. You might be dissatisfied with your plan or provider. Before you go down the rabbit hole of shopping for health insurance, take one minute to calculate how much you’d save in a best case scenario. Maybe if you got lucky you could save 30% on your health insurance costs. Who knows. But that’s what I’d use as an upper limit. So do the math and see what you could possibly save.
Once you have that number, you can determine whether it’s worth the time to try to get a better price.
Has it been a long time since anyone thought about it?
Drop into any established company and ask people, “why do you do it this way?” and very often you’ll hear that it’s been done like that for years, and nobody really knows, but once upon a time somebody made a decision.
There’s only so much that can be re-evaluated constantly, so it’s understandable that this happens. But in my experience, this is the most significant indicator that you should take a closer look.
What made sense to do 5 years ago might not make sense anymore. Things change. For example, the USPS changed the weight limit for commercial First Class Parcel mail from 13 ounces to under 16 ounces. That means shippers can use First Class instead of Priority Mail and save some money.
In our case, some time passed before we realized this change. We were using Priority Mail when the less expensive and virtually just as fast First Class Mail was an option. Doh!
Other Factors to Consider
While you’re looking for cost savings, there are some things to watch out for. You don’t want to be penny wise and pound foolish. Make sure you ask yourself these questions before taking action to cut costs.
How will this affect morale?
Sometimes being efficient means fewer jobs, but consider the impact on your remaining employees. Nobody wants to be asked to literally do the job of two people. If you have a plan to increase labor efficiency, try to do it in a way that keeps the number of positions stable while the business grows. It just feels much better to all involved.
Will this impact quality?
Will that cheaper health insurance plan be just as good? Will the new faster production method yield more errors? Sometimes you need to think a few steps downstream to make sure one change won’t have negative effects on other parts of the business.
Will you actually realize the savings?
Suppose you find a way to save 15 minutes of labor time per day for one of your employees. You could do the math and find out that’s a savings of $1,500 per year.
But hold on. If you implement that change, will you actually reduce that employee’s work time by 15 minutes per day? Will you pay that employee $1,500 less this year? No? Hmm. Then what are you saving?
Perhaps once you grow, you’ll be able to delay hiring a second employee because the first one is a bit more efficient. In the long-run you could realize some savings, but in the short-term, you might not.
Try it out
These questions have been helpful for me. One last thing. As you scour through your business looking for efficiencies, you’ll inevitably find that you’re doing dumb things (like we were). Don’t worry about it. That’s an essential aspect of personal and business improvement. Have a growth mindset!