Thursday, October 23, 2014

Looking Ahead To 2015: Make More Money

Every company owner wants to increase his profits. At the beginning of every year, many owners make plans to improve profitability but as the year progresses, they find it hard to follow through. On paper, the road to higher profits is pretty straightforward.

  • Cut Costs and/or
  • Increase sales

However, and as simple as they look, there are so many nuances to each that I’d have to write a book about each one. As with most things in life, there are a few ideas that can be put into place quickly and rather simply to really boost profits with a little effort on your part.

What could those be? You’ve probably heard about all the “system” type approaches such as Six Sigma, TQM, Toyota Production System and Lean Manufacturing. These are all sophisticated and thorough systems that define every aspect of a company and its processes and attempt to manage them. On the surface, these seem like the “right” thing to do. However, most of these systems are a bit of overkill for most small and medium sized shops. Perhaps some of the readers of this newsletter will disagree but with a few simple techniques and a little follow-through, much can be accomplished without these complex systems.

My approach is go back to the basics.

  1. First, make sure you know exactly how much a product costs you to make.  Without this clarity of your costs, you will be shooting in the dark when quoting and possibly leaving money on the table.
  2. Second, compare the actual time needed to complete operations in the process to those that were used to prepare the quote. If the time is lower than estimated, congratulations, you made some extra money. If higher, you must find out why and do something about it. Maybe you need to run the job faster or differently or buy outside costs using other sources. If you can’t adjust the process to be more efficient and lower the cost, you’ll need to raise the piece price.
  3. Third, and only after you’ve completed steps 1 and 2, can you then go out into the marketplace and confidently quote pricing knowing that you’ve wrung out all of the cost you can and that your price will achieve a known profit margin. If you need to negotiate with a customer, you can make intelligent and informed decisions about whether to lower or even raise a price to garner the work. (Make sure your price isn’t too low!)

These are the factors you can and must control to maximize your net profit. It also gives you the confidence that you have done everything to reduce your costs. Your customer is counting on you to provide quality parts, on-time at an agreed to price. Only by having a firm handle on your internal costs and pricing accordingly, can you actively sell your company’s products knowing that you will be making the maximum profits on each and every job.

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