We all want to grow our businesses – but too often the focus is (only) on increasing sales to achieve that goal. This blog runs through the logic of why that is not only not the way to go, but why it is easier, more reliable and cheaper to focus on improving what your business does first.
Setting the Scene
Growth can mean different things at different stages of a company’s life.
When small, or when times are hard, cashflow is vital. This means that expansion of operations will entail increased working capital costs just when the finance is not around. This could mean increased advertising and marketing spend, it could mean additional staff, extra equipment, more time to be paid for, and/or (for physical products) more stock and work in progress.
Yes – you can find ways round this – loans, invoice financing, discounting, etc – but all involve you losing part of your cut.
What if there was a way to increase the scale of your business without giving up some of your cut? “A pipe dream” I hear you say? No, it is actually straightforward and over 1.9 million companies around the world are already doing it.
What if you changed the efficiency with which you worked so that your profit was more than doubled? Actually it is not difficult and can be done with a few small changes.
Sales costs £70k
Gross Profit £30k
Profit £10k (ie 10%)
Stage 1: Make a few small (key) improvements
Say you can find ways to reduce the cost of your sales and reduce your expenses – for example:
- increasing the product/service sold to existing customers so that there is minimal on-cost in the sales process,
- reducing the overall cost of the input materials (stock controls, time management, enhanced training to improve output and raise productivity)
- identifying and improving on quality from your processes as early as possible so that minimal time and resources are spent generating waste or lower value goods
- developing an advanced product/service that you can sell at a higher margin (often to existing customers let alone to new ones)
- outsourcing non-key areas (staff catering, bookkeeping, cleaning, maybe even marketing and IT)
- stripping out non-key activities (the Expo you do each year because you have always had a stand there)
- enhancing staff and customer feedback to drive improvements and clarify what is wanted to perform optimally and/or buy more
… and so on
Say you manage a 1% improvement for each of the 7 things in the list above (which is by no means complete), then this will result in an improvement in the profit. OK so no surprises there. This is only stage 1 of the process.
But wait, how much improvement will arise?
Stage 2: Watch those improvements ripple through the business
Well if you improve your quality control by 1% (from 5% to 4% return rate), you will reduce your client complaints by 20% (1/5th of the original) which reduces the amount of time taken to handle them. This time can then be repurposed to discussing with clients what they really want and feeding this back to product/service improvements.
But wait! If you no longer have such a bad product/service, then the costs incurred in making the removed bad product/service are no longer written off, they generate income. So this means that the cost of sales for those items that have had to be reworked/replaced will fall by 20% too.
Also you will generate less waste to be disposed of – meaning your waste disposal bill falls as well – possibly also by 20% (because you are not disposing of as many failed products as before).
This means that the nominal improvement is no longer 7% (1% x the 7 areas listed), but is now closer to 15%. And how does this show itself:
Cost of Sales: £70k less 15% = £59.5k
Gross Margin: £40.5k
Expenses: £20k less 15% = £17k
Profit: £23.5k = 135% increase!
Now this is only stage 2.
Time Out: Reviewing what would happen if you attained this via increased sales
Before we go further, let us compare what it would have taken to get a 135% increase in profit by ‘simply’ increasing sales.
This would, using the old ratios, require an increase in turnover by 135%. Where are the additional sales coming from? Where are the sales personnel to manage this additional selling? How are the additional products/services to be produced? Where are the additional personnel to cover this to be paid? Where will all these people be working – this is looking at more than 50% increase in staff (or the existing staff are drastically underutilised)? With the original complaint proportion at 5%, this means that the complaints rise as well in proportion so the amount of time on complaints would be 135% greater too – as well the number of dissatisfied customers, leading to more public release of bad feedback for prospective customers to find.
How is all this to be paid for? Remember the starting premise was that you were either just starting up or times were hard – so increasing turnover will not help this initially. Yes, longer term you will make profit, but there are other detractions that come with it.
Far better to sort out your processes first so that you minimise waste and maximise return on the time, money and effort already invested.
Stage 3: Building on the Immediate Results
So what other stages are there? These depend on the business and the processes you have. The first 2 stages relate to the financial/managerial mix. The next stages depend on the procedural, physical and industrial background to your operations – and so are difficult to describe generically.
As an example: a factory floor has five machines to make product, 3 storage areas to keep stocks of materials, work-in-progress and finished product and a quality assessment / returns area. Additionally there is a staff canteen, wash rooms, kitchen, offices etc.
By looking at how staff work, improving their capabilities through enhanced training, fewer staff are needed on the production line for the same volume of production. They are paid more because they are more highly trained, but they produce proportionately more still so this is a cost-effective move. These are all stage 1 and 2 type changes.
Stage 3 comes because a more productive team requires fewer staff and fewer production machines. Enhanced quality means the returns area gets less work, so staff there focus on further improvements, but based in the offices, again reducing the floor space required. Switching to just-in-time systems for taking in materials and sending out product reduces the storage areas needed. This space reduction allows a larger lorry loading bay which in turn permits a throughflow process rather than a complex turning and reversing to position before loading/offloading. This frees up working capital held in stocks – which is a one-off action that can help pay for the changes and training. It also means that clients can buy higher spec product for more immediate delivery, with more reliability from a higher trained, happier team. Wy would they not want to come back for more?
Stage 4: Internal Funding – no loans required
The beauty of this is that the costs incurred are paid for by internal improvements. If staff no longer needed on the production line are re-tasked to cover client liaison, product development, quality control and loading, then no staff losses need take place (saving more costs and enhancing morale). It cannot all be done at once, but each step releases funds for the next. While this might be sped up with additional funds, the whole point of this example is what can be done without extra input of cash.
But How Do You Do This?
So the question remains: how does this get done? Who is to say what is the best way forwards? You will not be surprised to know that many people have looked at these questions for many years. In fact some of them got together to draw up the best ways of running a business to ensure this sort of thing can be used to that business’s advantage. The result is the ISO Management Standards – most specifically the ISO 9001 Quality Standard. Don’t be fooled, the main aim of this standard is to address customer satisfaction. Why? Because only the customer knows what “Quality” is. So by enhancing the product, the staff, the process and the checking of everything to reduce problems and faults, the net result is a happier customer – especially when that customer is regularly asked for input into the process to improve it.
Don’t feel sure?
- 1.9 million organisations around the world have an ISO standard (by comparison Investors in People is boasting of over 10,000 companies on its global books).
- Government offices and local authorities often require ISO as a pre-requisite for tender applications?
- There are some fields where the industry players will not deal with suppliers that do not have the relevant standards? Eg Aviation or automotive industries
- Some ISO standards are a legal requirement in some areas (eg Forensic laboratories) in both EU and US law.
But how can an ISO standard help you? We have over 20 years of operation and a 100% record of gaining certification first time. Our tailor made but cost-effective approach will take your business to the next level. Call Qualitation on 0345 600 6975 and find out more!
Not sure? Try our free Quiz to find out how close to gaining an ISO standard you are – click here to access a series of questions that will tell you all you need to know.