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Although your company is seeing increasing sales, you are upset each month to see that your profits are staying the same or even declining. If this sounds familiar, you may be a victim of profit margin killers that are sapping the lifeblood of your company. Margin killers are mistakes and inefficiencies throughout your organization that, though they may appear little on their own, when added together can mean the difference between a successful corporation and one that struggles to survive. In every industry, what sets the top businesses apart from the laggards is their capacity to eliminate margin killers.
How to get rid of things that reduce profit margins
Understanding how to analyze your financial accounts, identify where you are losing money, and determine how to stop cost and revenue leaks are essential skills for minimizing and eliminating profit killers. Let’s examine five margin killers and their elimination with this in mind.
Pricing that doesn’t accurately reflect your costs
When determining prices, businesses frequently overlook or understate costs. A landscaping company might bill for worker time spent on a project but not for transport time to the location, for instance. Another possibility is that a manufacturer will establish prices that fall short of covering expenses like running a business, keeping up equipment, or paying the accountant.
To ensure that they are all taken into account when determining your profit margins and pricing, you must carefully review your direct and overhead expenditures. In a period of growing inflation, this is even more crucial. Prices charged to you by your suppliers are increasing. Make sure your pricing reflects this fact.
In the event that you raise your rates, are you concerned that clients may choose a rival? You have no other option. You’re in business to make money, and sometimes it means making difficult decisions and having difficult conversations. Being open and honest with your customers about the costs associated with providing them with a good or service is the best course of action. Make the necessary adjustments to your firm and/or operational strategy if your company isn’t profitable at a fair price.
Retaining things that aren’t profitable
You might not even be aware that certain products are costing you money. In order to separate the profitability of various goods and services, it is crucial to study your financial data. It’s conceivable that you’ll discover you’re carrying both winners and losers.
Unprofitable products can be traced so you can determine what to do with them in the following ways:
- Might you increase your asking price for those items?
- Should you continue selling the goods since it is a strategic necessity to make other sales?
- Can they be produced or provided in a more effective way?
- Do you have to completely get rid of them?
Poor client relationship management
Some consumers will always take more time and attention than others. And because of that, they are more expensive for your company. They might, for instance, supply a document you need to begin a work late. It’s also possible that they’ll request additions or adjustments that weren’t outlined in the agreement you signed.
Companies too frequently agree to perform additional work without charging for it. On one construction project, we discovered the company had given away free labor on client adjustments that was equal to 10% of the overall project revenue.
Planning ahead and remaining watchful are essential when dealing with these types of margin killers. Include billing details for changes and additions in your contracts. Make sure your staff always notifies you in advance of the work being completed about unexpected demands, and then informs the client of the cost.
Permitting unchecked direct and overhead cost growth
A lack of rigor in expense control can frequently result from growing income. If you closely examine where your money is going, you can find that you are paying more for items like new hires, vehicles, or marketing and advertising but not more money. Keep an eye on your gross margins; if they are gradually decreasing, your production may be diminishing, and you need to address this right away.
In order to further control overheads, we advise creating and then adhering to an overhead budget. Instead than only using last year’s figures, the budgeted amount for each line item should be determined through analysis. For any significant increase, a business case should be presented.
When determining which costs to cut first, apply the 80/20 guideline. Consider the expenses that account for 80% of your overall spending and try to cut those. You will gain the biggest benefit from your efforts there.
It’s also a good idea to shop around occasionally to see if you can save money on fixed expenses like insurance, telephones, and maintenance agreements.
Ignoring technological advances
In the struggle to eradicate profit-robbing practices, technological solutions are invaluable. They can assist you improve your processes, customer interactions, and pricing while identifying areas of profit leakage.
Among other critical performance indicators, your accounting software can be used to analyze spending, calculate profit margins, and keep an eye on asset turnover.
Software can be used by manufacturers to track the amount of downtime that arises from equipment maintenance and factory line upgrades. Comparably, timesheet tracking software enables you to keep tabs on employee productivity and produce data for invoices.
Using a dashboard and KPIs to track your progress toward your objectives, you may work to constantly improve once you’ve identified margin killers.
Summary
For your firm to continue to be profitable, competitive, and expanding, you must keep your profit margins at a healthy level. The best companies become stronger with each year that goes by in this way.
