You have two options to make your business more profitable in 2008: Increase revenue or decrease expenses.
I have compiled a list of the top 10 items that I have recommended to my clients. Feel free to e-mail me at email@example.com with any comments, questions, or feedback.
1) Increase your inventory by one turn. If you increase your inventory by one turn, you will free up cash and you can use the additional money elsewhere. Determine your turns by taking your cost of goods sold (COGS) for the last 12 months divided by the average inventory value over the last 12 months. For example, if your current 12 month average inventory value is $1 million and your 12-months COGS is $6 million, you have six turns. If you take $6 million and divide by seven, your new inventory value will be $857,143. This is $142,857 less inventory dollars than six turns. The 2007 Cost of Doing Business Report stated average turns for a typical dealer was 8.17 turns. Do not include special orders or direct shipments in this calculation.
2) Reduce Your Inventory Shrinkage. A rule of thumb is to accrue 0.5% of sales for shrinkage. This means that if your sales are $10 million on annual basis your inventory allowable inventory shrinkage is $50,000. I say, "Baloney!" This is too much. If you are the inventory manager, shoot for 0.5% of the inventory value. With sophisticated software systems, cameras, and well-trained employees, your inventory shrinkage should be much less.
3) Implement Transparent Pricing. On average, I am seeing people achieve a 2% increase in margins implementing by raising margins on "C" and "D" items. For more, see my column on How to Add Two Points to the Bottom Line Without Tipping Off Your Customers. 4) Implement Price Matrix Pricing. Traditionally, companies assign price levels to customers based on volume, customer type or required level of service. For example, if you have a roofer purchasing 90% of his product mix in your roofing category and he is on the lowest price level, move him to a higher price level on all other departments. If you move the price of his bottom 10% of items up 10%, you will achieve approximately a 1% increase in gross margin. On average, I am seeing a 1% increase by implementing this strategy.
5) Improve Employee Productivity. One example may be where your delivery driver has to make one more run on a Friday afternoon. Once it reaches 2 p.m., overtime pay typically kicks in. The result often is that, prior to the driver leaving the yard, you ask him to move fast, take short-cuts, unload the material and hurry back to the yard; only to penalize his time for the week. Meanwhile, the driver is thinking that if he takes his time, he will be compensated with overtime. My answer: Pay for performance, not for hours. The industry is going this way. I would not like to see you get caught with the nonperforming drivers in your market. For more, follow this link for Employee Evaluations .
6) Manage Your Accounts Receivable. Don't just manage a relationship with your customer get in bed with your customer. Understand more about their business then they do. Follow this link for Accounts Receivable Management.
7) Use the Expense Input Rule Before Spending Money. Here is the simplest decision that you can make as a manager. If somebody asks you to pay for a trash dumpster and it will cost $100 per month and you are running at a 5% pretax profit on operations, then you will need to sell an additional $2,000 per month to pay for the dumpster or reduce your existing costs by $100. 8) 8) Make Sure Employees See Expenses. If an employee makes a decision to create an expense, he should see this on a P&L. For example, if you have an employee that purchases a forklift, every month that employee should see all costs associated with the purchase prior to payments.
9) Sell More to Your Existing Customer. Determine what products your customers are consuming but buying elsewhere. Rank your customers sales from highest to lowest, breaking down by sales and profit by departments. Determine which products your existing customers are not purchasing from you. Can you service the customer with the products and make a profit? Also, should you stock any products that your customers are using, but buying elsewhere because you don't stock?
10) Move from a paper environment to a paperless environment. You can move to a document imaging system to scan all of your documents, including bills of lading, AP invoices, AP checks, purchase orders, work orders, invoices, and other documents. When you are searching for an item, these should all now be linked from the bills of lading to the accounts receivable payment. You can use your existing software vendor or a third-party product. You must become more efficient in finding information. One dealer who I spoke with recently said he saved 1-1/2 employee's time from day one of implementing a document imaging system. He also saved on postage by e-mailing signed copies of work orders.
In addition to looking at financials and reports in 2008, I recommend that you reconnect with your customers. It cost many time more dollars to get a new customer than it takes to keep one. You know the old saying, "The customer signs your paycheck."
Have a profitable 2008.