Is your business giving you what you want out of life? Is your business growing, maximizing profits and creating free time for you to achieve your personal objectives?
Let's take a cue from author Jim Collins. He states a company can go from "Good to Great" if it determines and understands the interaction of three elements: 1) What it is deeply passionate about, 2) What it can be best at in the world, and 3) What drives its economic engine. Let's focus on what drives your economic engine by determining the best way for you to analyze profits in your business. We want to decide on what is your profit per "x".
Measuring Profit Margins Whay key ratio do you use to measure the success of your business? Think about it in terms of the following question: If you could pick one, and only one ratio - profit per x - to systematically increase over time, what "x" factor would have the greatest and most sustainable impact on your economic engine?
Let's assume that you conduct your business from one location, and that you measure your success by the amount of profit you make. The next question is, profit per what (x)? Is it profit per customer, per product or service, per employee? Which "x" factor, by focusing on it and improving the ratio over time, would provide the highest and most sustainable economic growth? Let's illustrate with a few examples:
1. Profit per customer In this instance, you're looking to increase the number of transactions by each customer. You develop strategies to get your customers to come back repeatedly and buy higher-margin products. An example is Gillette. They moved from disposable razors to high-tech razors with disposable click-in razor blades. A subtle shift - but with higher technology products, their repeat transactions become far more profitable than the old disposables. How can you apply this concept to your business?
2. Profit per product/service Now, let's look at increasing profit margins in two additional areas. First, reduce the cost of providing your products/services by negotiating better agreements with suppliers, and reducing your production costs. You develop strategies to employ technology to reduce the cost of producing goods or services. If you're outsourcing the technical part of the job - is the organization you're using employing the most sophisticated and efficient methods available at a more effective price? Would you be better of doing it in-house?
Second, increase the efficiency of delivery and distribution of your products/services. Focus on creating a more productive team which will do the job better and more efficiently; and improving your business systems to eliminate unintentional slack.
3. Profit per employee Here we focus on measuring profit per staff person. You develop strategies to run the most cost-effective team - not just in the sales department, but overall. You hire the right people, for the right positions, with the right level of self-motivation to drive the business. Take your time filling higher positions with the right people, and then establish great systems to support them. Your high-caliber team will then take care of the rest of the business.
So, there are three examples of key profit ratios that you can use to drive your economic engine. Do you see how each "x" drives a different set of decisions? And there's more. How about "profit per customer visit?" What if you have a multi-location business and you're looking to expand? Do you measure "profit per outlet" or "profit per region"?
Southwest Airlines measures profit per plane since their brand promise includes lots of flights which focuses management on the number of planes in the air. What profit per "x" will you choose to drive your business decisions?
So, go ahead and pick one - just one! Then measure it and focus on ways you can increase it over the next six months. Let us know your results - we'd love to hear. And if you're not sure which measure to choose, or what its effect might be, call us today.
What Drives Your Economic Engine - To learn more about this author, visit David Carter's Website.
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David Carter
(Visit David's Website)
David's professional career has taken him
around the world living and working in the
US, New Zealand and the UK. He has held
senior executive positions within the
Thomson Corporation, Wolters Kluwer, and
Ziff-David publishing companies. David has
led small and large organizations in the
healthcare, franchised executive suites,
and service industries. In addition, he
successfully founded and developed two
businesses: American Trade Exchange, an
import and export company, and a PC
systems development and training company.
These have provided excellent environments
to "practice what he teaches." He is a
Contributing Author for Walking with the
Wise II, Mentors Publications. David
founded ActionCOACH Philadelphia in 2002
and has been successfully coaching and
training businesses in the Greater
Philadelphia Area. He has helped privately
held and family owned businesses, as well
as senior executives, to realize their
personal, financial and business goals,
and to achieve greater lifestlye. Visit ww
w.actioncoach.com/davidcarter to learn
more about David.
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