5 Hidden Sources of Profitability in an SMB

At some point in the lifecycle of an enterprise, the focus moves from acquisition of clients and sales growth at all costs to a focus on profitable growth. After a few years, impatient stakeholders start to question when are they going to start to see a return on their investments.?

It seems counterintuitive to try to continue to grow sales while also focusing on profitability, because at first thought, to increase profits, an organization must increase its prices. But there are many ways to increase profitability that don’t involve raising prices. In fact, if uncompetitive pricing is limiting sales growth, quite often it’s possible to increase profits while simultaneously reducing price and still achieve consistent increases in revenue, year after year.

Here are some places to look for funds that can be freed up for distribution to investors (or anything else you want to do with the money):

Employee Expenses

For most businesses, the largest controllable expense is employee compensation and benefits. If the same amount of work can be done with fewer people, there can be significant savings. But if you’re looking for growth, you’ll want to retain those team members to be able to fulfill more purchase orders without adding personnel, or at least not at the same rate as before.

Work-in-Process

It’s obvious in a manufacturing environment, but perhaps less so in an office or services setting. When materials are withdrawn from inventory to be put into production, they become work-in-process, along with the time that employees use to convert them into products and any overhead costs that are applied. (The analogy in an office is work that has been started by an employee but is not finished. Of course, this usually only involves the employee’s labor.) To get an idea of the potential savings, take a stroll through the factory and notice how much material is waiting ahead of each stage of manufacture. Anything above zero is a potential opportunity for savings.

Quality

Whether defects are found by the customer and the product is returned for repair, replacement or credit, or QA personnel discover quality issues before the product is shipped, the company has additional cost to correct the problem. Of course, it’s better that the problems are found in-house. Better still is to avoid defects before they occur.

Raw Materials

Companies that do a poor job in planning need to have a lot of inventory waiting in a warehouse “just in case” products are ordered by customers. The more product SKU’s are offered, the worse the problem becomes. More profitable organizations often employee one or both of the following concepts:

1. A rigorous Sales, Inventory and Operations Planning (SIOP) process. Teams meet regularly to understand likely upcoming demand for products based on marketing initiatives, seasonality, historical demand, etc. This is typically the responsibility of Sales or Marketing. Likewise, the Supply Chain and Manufacturing folks meet to understand upcoming capacity of production. Matching demand and capacity results in an optimum production plan, minimizing the need for just-in-case inventory.
2. Just in time Delivery. With good planning, companies can work with their vendors to take deliveries more frequently, in smaller quantities, to handle needs only for immediately upcoming production needs.

Employee Ideas

Who better than your own team members to offer ideas as to how to improve Productivity, Quality, Lead Time and Safety? Each of these areas offers a myriad of opportunities to reduce costs.

One way to get started on identifying these opportunities is by implementing Lean Production in your manufacturing, service or knowledge work environment. What is Lean Production? How do you do it? Are there other alternatives to achieve the same goals?