Profit Improvement

Small business finance & accounting

This business support module discusses business improvement processes to help improve your business' profitability.

Learning outcomes:

  • Overview of three stages of Business Improvement
  • How you can minimise waste in your business
  • Profit Improvement Techniques

Video Presentation: Profit Improvement

Profit Improvement

Hi, my name's Di Brown. I'm a chartered accountant and business advisor with SRJ Walker Wayland. I have over 20 years experience working in the SME market with a wide variety of clients across a very broad range of industries. But my passion is education, and educating business owners, such as yourselves on the importance of planning for success and working with you to develop strategies, and assist with the implementation of your strategies and action items to achieve your business growth and profitability goals.

Three stages to improve your business' profitability

So we all know that profit is the lifeblood of any organisation. So today I'm going to be giving you some practical tools and tips on how you can improve your business profitability and give your business that little bit of a profit transfusion.

So to do that, I'm going to take you through a couple of different tools and techniques. We'll look at the three different stages in any business improvement process. We'll look at waste, and ways you can reduce waste within your business to increase your efficiencies, which will lead to improved profitability. And then we'll talk about some other general profit improvement techniques that you can look at within your own business.

So whenever you're considering during a business improvement process, there's always three key stages of that process and it is a long-term process, and as you move throughout the stages, you should be revisiting what's working and what's not working, and it should be a continual improvement focus within any successful organisation.

So stage one, your business improvement process is what we call the visible. So it's looking at ensuring that you have the right structure for your business. That you have the right products. That you have the right client mix. That you've got your pricing set right. That you've got staff with the most appropriate skillset for the roles, and that all of those structural items of your business come together to form the basis on which to grow and improve your business profitability. So step one is getting a structure right.

Step two is looking at the efficiencies and or inefficiencies within that structure. And that means considering areas where waste occur. So traditionally people talk about profit improvement. They talk about you three profit drivers, and I will talk about those as we go throughout today's webinar.

So your three key profit drivers of any business are increasing your revenue, reducing your variable expenses, and reducing your overheads. So you get those under control. Do those three together you increase your profit? But what that doesn't do, is it doesn't focus on inefficiencies that occur within a business.

So step two in our process is making sure that you look at areas where inefficiency and waste occurs within your organisation to also facilitate your profitability. And then underlying those first two stages is the, the most challenging part. And that is developing your culture, and the beliefs and culture that in your long-term strategy that supports achievement for success for the individual and also the organisation itself.

So start at the visible, and then you move your way through to making sure that you're developing that culture of success within your organization.

How to minimise waste in your business

So if we today, focus on the second part of that business improvement process. And that's increasing efficiency. That means we need to look at - Where waste is actually occurring within your business.

So studies have shown that up to as much as 30% of the operating costs in any business can be attributable to potential wasteful practices. So rather than focusing on increasing your sales and reducing your costs, we're going to focus on reducing waste to improve efficiency, to improve profitability.

So how do we do that? There's a five step process. So those of you who are familiar with the way that I work and teach, there's always steps to a process that will lead to an actual outcome. And in this case, that outcome that we want is improved profitability.

So step one is you've got to do a waste audit. So you need to have a good look at your business to identify where areas of potential waste and inefficiency are currently occurring. And I'll take you through those seven key waste areas in today's webinar.

Second thing you need to do, is you need to rate and prioritise areas where you can get efficiency increases on a reasonably quick basis to develop your momentum.

And then you move to step three. So you prioritize which of the three to five key waste areas you're going to focus on. You move to step three, which is you develop your teams. So who is going to be responsible for achieving this reduction in waste and increasing efficiency? What do they have to do? And when do they have to do it by?

So you need to be pulling together a one page waste improvement plan. You allocate it to the appropriate team managers and members, and then you set in place measurements to actually track the outcome of that. So this is step four in this process, and it's looking at your financial and operational KPIs to check the success of the strategies and actions that you're actually undertaking.

And step five is repeat. So any continual improvement process should be done on a repetitive basis to ensure future success for your organisation.

1. Conduct a waste audit

So. Step one in that process conduct a waste audit. So look at the seven key areas where wasted. And I'd like to say that I came up with in key areas, but I didn't it's was formed by, Taichi Ohno, who was the production manager at the time of Toyota manufacturing. We all know who Toyota is and he is given credit as being the father of what we now refer to as lean manufacturing. But even though it came from a manufacturing background, the processes and areas of waste are just as relevant to a manufacturing, a retail wholesale, or a service entity. So what we want to do now is we want to think about those seven waste areas, and where we could have waste in each of those areas that within our own businesses.

So the first area that you need to consider is overproduction. So what is overproduction? It's simply doing something in excess of what you need to do. So it can be things like, are you purchasing too much? Have you racked up too much staff overtime? Is there a better way you should be doing your staff scheduling? Have you got the most appropriate product range for your business? Is your product mix right in terms of profitability?

So one of the easiest ways to grow revenue, is work out, which products have the highest margins and sell more of those products. So your low margin product, unless you're selling significant volumes of them, maybe you need to be considering having another look at that particular product in your product mix. So get your product range right.

Over servicing. So for those of us in the service industry, this is a big area of waste. That means, doing more than what is in your proposal or your service scope. And we refer to it also as scope creep. So over-servicing is another area, in particular for service businesses, where there is waste in the overproduction area. So that's waste area number one.

2. Waiting = inefficient practices

Waste area number two involves waiting. So wherever you have waiting between steps in a process, you are losing time, which means you have got potentially inefficient practices, which means you have waste and reduced profitability associated with that process.

So let's think about areas where waste can occur in a business. It can be production holdups. It can be material supplies. So if you're waiting for some of your raw materials to come in, it can be waiting for your subcontractors that you use to either give you some costs, help you with the invoicing so that you can get it out to your clients to actually get to a job site. It can be things like a customer or client waiting for a response from a query or waiting for a good. What's the risk of the wait time being too long there? They go somewhere else. Particularly if they're at the inquiry stage. So waiting is a really inefficient practice.

The other area where we see weighting waste a lot is where you're waiting for management decisions. So if you've got eight or nine people that you need to get consensus of, in terms of a decision, that tends to take a long period of time, so you need to be streamlining your authorisation levels. So waiting is waste Number two.

3. Optimise your transporting

Waste number three is in your transporting. So wherever you are transporting between stages in a process, and this includes the internal and external movement of not just your stock, but your people and your goods and your information workflow. So transporting is another area where waste can occur.

And this means thinking about, do you have excessive material handling? Do you have appropriate layout in your factory and office to minimize movement throughout your office or your factory site? Are you doing multiple delivery runs to different clients when you could in fact be do doing one delivery run a day or one in the morning, one in the afternoon? Are you using the most appropriate method of transport? So, for example, are you using independent couriers? Have you done a cost benefit analysis to work out whether it's cheaper and more profitable for your business to actually purchase a delivery truck? Are you getting the best rate from the courier service that you're using? Are you traveling to clients too often?

One of the big learning points for me, and one of the positives of COVID for our firm is that, clients are used to us going and talking with them face to face and taking them for coffee. We haven't been able to do that. So we've been still doing with clients, but we've been doing it via Zoom and Teams and other network platforms that we operate. And the amount of time it's taped us as advisors traveling to and from the clients has been phenomenal. So it's actually resulted in increased efficiency. So increased efficiency reduced waste in that transport and travel leads to increase profitability.

4. Inappropriate Processing

Waste area number four, inappropriate processing. So this means, thinking about, are you using the right tool, process or person for that particular job? So a classic example of where we see waste in this area, if you've got the wrong staff role fit. So if you've got a particular staff with a particular set of skills that maybe doesn't have the required skills for that particular role, are they actually in the right role? Is there somewhere they are better suited within your organisation? So doing a skills gap analysis on your staff is a really useful benefit to most businesses to identify where there's any particular waste in terms of role fit for staff.

Using outdated equipment. You should be making sure that you're using the most appropriate cheapest, reliable, an innovative piece of equipment that you can for that particular job.

Another area where I see waste a lot is, if you have a Sales force, for example, or a sales team, and those sales team are doing admin procedures. That is a big waste in any organisation. Those sales staff are particularly skilled what they do, which is generating business and dollars in the door. Don't bog them down with particular admin work that can be done by a more appropriate person, potentially at a much lower salary rate. So make sure you've got your skills matched up to the role.

And the other thing is documented systems and processes. So where you don't have adequate documentation and you have staff changes or part time job workers etc. wherever there's any re-creation of a process or a system there is waste.

So make sure that you considering that you have all your processes, procedures, and documentations in place that are efficient and documented to be able to reduce sending a double up or processing time.

5. Unnecessary Inventory

Area number five is where you've got unnecessary inventory. And bear in mind, the more stock levels you have, the more cash you have tied up. Cash is the lifeblood, as is profit, of any successful organisation. So we need to be making sure that we've got our inventory levels just right, so that we're not stocking too much stock. So that means reviewing your raw material purchases, making sure that you've got your finished goods out the door, that your process billing throughout, that you've minimizing your work in progress if you're a service organisation. So don't be holding too much stock.

It's looking at your product range, making sure that your product range consists of product that is turning over on a reasonable basis and that you don't have any obsolete stock. So any unnecessary inventory is a potential area of waste.

6. Consider Unnecessary Motions

The sixth area of waste involves considering unnecessary motions. So this is looking at where you have poor ergonomics or poor time management occurring within you organisation. So this can be something as simple as your factory or office layout. So have you on your production floor, got your materials flow correct. Have you got stairs in your office and do staff have to go up and downstairs several times a day? That can involve a lot of time, which is a potential waste area. And probably the area where I see waste in this area the most is that stop start mentality. So this means where you start a job before you either have all the information or all the materials necessary to actually complete that job. So you want to minimize any what we call pickup or put down time on jobs to improve efficiencies, to improve your profitability.

It's also about involving as fewer people as possible in decisions. So whilst management needs to be making those decisions you need to streamline those processes and access to decision makers.

7. Defects or Rework

Waste area number seven involves any defects or rework. So any area that results in double handling leads to inefficient practices, which results in waste. So areas where this can occur is particularly around poor communication. So if you've got managers that don't know how to issue instructions correctly, or they're issuing instructions that maybe aren't following processes or procedures that are documented correctly, you've got potential areas for re work. So we need to be minimizing those.

With computer input errors is another big one. I've got a manufacturing client that recently made a whole batch of the wrong color grout that had to be scrapped simply because the operator at the time entered the wrong code when they were doing the mixing for that particular piece of grout.

Poor workmanship is another area, where you've got to read do something. So you want to be minimizing it areas where rework and defects actually occur.

So once you've gone through the seven areas of waste, we want to put it into a waste audit template.

Identify three or four potential waste areas

And then there's an example on the screen here to show you. So the first thing you do for each of the seven areas you want to rank at least three or four potential waste areas. The second step is you want to allocate a cost to them. And this is the area where clients struggle with the most.

Try and think, and I know it's really hard, but what potential cost impact could be occurring as a result of that particular waste. So if you're duplicating things, how many times are the they being duplicated? What's the cost associated with that? If you find this step too hard, simply rate it as low cost, medium cost, high cost. If you can't actually allocate a dollar. So then you go through and you allocate potential costs.

And finally you want to rate the ease of removal. So you want it to be going from, I don't know, a scale of say minus five to positive five. Five is okay, pretty average to remove. Minus five is really hard to remove. Positive five is it's really easy to remove.

Once you've rated them you want to pick the ones that you want to follow through on, and they need to be the one ones that have the easiest rate of removal with the highest dollar value attached. And the reason we want to focus on three or four, and the easy ones first, is once you start building some momentum and getting some success and some runs on the board, people are more willing to buy in and then start to tackle the harder programs and the harder projects. So you start with three or four easy ones first, and you work your way through those.

So that's your way of minimizing waste to improve efficiency, to improve your profitability.

Profit Improvement Formula

Now I said at the beginning, the more traditional approach is to look at ways to increase the sales, reduce your cost of goods sold, or your variable costs, reduce your overheads. Which will give you your profit improvement formula. So another way to approach this is to put it in some sort of the template where you can look at, if we do X, what will be the impact and put a dollar back, you were around it.

So it can be things like how can you increase your sales? Do you have too many sales staff? Do you need to reduce your sales staff? Do you need to look at your commission structure for your sales staff? How can you decrease your overheads expenses? Do you need to reduce some salaries? Can you reduce your warehouse size to hold less stock? Have less inventory tied up, which is better for your cash flow. If you're looking at increasing your sales, can you do some clustering? So what does that mean? Can you sell different product packs together? Can you reduce some of your variable expenses?

So going through some of the more traditional means with your advisors to look at ways you can increase sales and reduce your costs will also improve your profit.

Whichever approach you take, and it's always good to have a mix of the two. You need to be forming your detailed strategies and action items, allocating them to your teams with some implementation dates and responsibility, some accountability in the form of KPIs to measure the impact of that potential profit improvement strategy.

So both financial and operational KPIs, and you need to be repeating if cycle. So in terms of profit improvement, it's a continual improvement for your business. And I hope today's webinar has given you some examples and some ideas on things that you can go and do in your own business to give your own business that profit transfusion it might need.

Thank you.

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