Naturally, every business owner wants to maximize profitability; it leads to financial security for both the owner and the employees, as well as their families. Following general best practices can help your business enhance its profitability, no matter its size, industry, or geographic reach. In today’s competitive environment, this can mean the difference between thriving and surviving. The following are best practices for maximizing profitability.
Monitor actual vs. budget regularly. Not only should you prepare a realistic project, departmental, and company budget, but you should keep it handy and review it often. During good and bad economic times, compare your budget to actual expenses every month, and analyze and understand the variances.
Look for answers to questions such as “What are our actual operational costs? Payroll costs? What is our real profit by job? By client? By segment? Do we have the ability to break down our business at its lowest level?” If you think those questions are difficult, consider an even more vexing one: What happens if your budgeted revenues drop, or your budgeted expenses increase? What is your game plan if you see expenses running out of control, or even worse, revenues plummeting? While many general operating expenses can be revisited and adjusted fairly easily, that’s not necessarily the case with payroll, benefits, and related expenses. The key to surviving such a shot across your bow is to think about it now, before it hits. Devise a plan today so that you can take action quickly if the need arises.
The most important time to keep up marketing is during a down economy.
When profitability declines, owners often look to cut costs wherever they can. Unfortunately, when this happens, marketing is often scrutinized the most. Understanding an entity’s return on its marketing spend is important.
When times get tough, the tough keep marketing. Most, however, pull back on their marketing efforts. And they pay dearly for it. There isn’t a more important time to keep up the marketing than during a down economy. It’s more critical than ever to get out there and continue to build strong relationships with customers, referral sources, and prospects. Be sure that marketing is a line item on your budget, and always keep it there. And while your competition cuts back on marketing, and their brand vanishes, your standing in the industry will not only remain intact, but will actually grow inversely proportionate to how your competitor’s has diminished.
Think carefully before adding additional services to your existing business model.
Companies typically want to be ‘all things’
to their customers. Additional service offerings may add to top-line growth, but could prove to be a detriment to overall profitability if the additional services offered turn out to be loss leaders. The additional offerings, such as becoming more “vertical”, may also be a drain on the resources the company allocated to its core business, potentially diminishing its quality and overall brand.
Adding services to make your company more vertical became very popular during the Great Recession. Whether it’s done organically or through acquisition, vertical integration is becoming a more important business strategy in many industries. Vertical integration gives a company control over more aspects of their business. They have the ability to dictate the types and quality of services or materials being delivered to the customer, which allows more control over the image and success of their company on a very intense level. On the other hand, a major challenge to vertical integration is the loss of focus. Most companies have a general goal for their long-term future. There is a risk of focus shift from the customer experience to the more tactical issues of managing the complexity of a vertical company, with multiple leadership teams and supply-chain issues, which can become more difficult to resolve. In addition, it may become extremely difficult to adapt to new circumstances. Although you will enjoy the benefit of profit margins from more stages of the products or services you offer, flexibility could be hindered. New products and services now need to be designed and tested, not simply purchased.
Perhaps you’re already implementing some or all of the aforementioned best practices, or perhaps you’re not. Whatever your unique scenario may be in today’s highly competitive environment, following these best practices can help your business enhance its profitability, no matter what its size or geographic reach. In today’s white-hot competitive environment, improving efficiencies can spell the difference between thriving and surviving.
About the Author
Jeffrey Stuart, CPA, is a director in Citrin Cooperman’s Norwalk office and has over 14 years of accounting experience. Jeffrey provides a mix of audit, accounting, and tax compliance services to closely-held businesses. He can be reached at 203.847.4068 or at firstname.lastname@example.org