According to Jim Rathbone of Rathbone Results there are 19 ways to reduce costs and increase your profits
There are three main ways to improve the profitability of your company: Sell more, price higher and reduce costs. Some organisations focus mainly on selling and on delivering great service to customers. That is great. Let us remember that profits can also be increased by greater cost efficiency. How do we achieve this?
At Rathbone Results, we draw on many practical ways to help our clients reduce costs and increase profits. Here are 19 potential actions. How many might you work on to make your business more profitable?
1. See every cost as “up for grabs”. No cost is too small to worry about. Ask yourself: “If I eliminated this cost, would revenue, customer satisfaction or profits be adversely affected?” For all costs associated with customer satisfaction, be sure you are only spending on what customers really value.
2. In areas where you wish to control costs, set authorisation levels so that approval is required before the expenditure is made.
3. Speak to your suppliers and negotiate reductions on the cost of your purchased products. What % of your sales are you spending on purchased products? If this is 40% and you reduce by 5%, you have added 2 margin points to your bottom-line. Start with the highest cost items first. You may wish to join one of the industry buying groups if you are not a member already.
4. Never let the purchasing person be the sole person negotiating the price, as this individual can get too close to suppliers. You need to retain an element of the “tough guy”.
5. Improve the direct labour cost efficiency. The efficiency of your engineers, whether employed or subcontracted, is a huge area of opportunity. Direct labour costs can vary widely across the installer community from 20% to 35% of sales. There are a myriad opportunities to improve direct labour cost efficiency and some of them follow.
6. Start measuring your actual direct labour cost as % of installed sales. You should also track the gap between the priced labour and the actual labour used – which can run into tens of thousands of pounds of lost profit.
7. Make sure your installation costing sheets capture all the known costs in the job. Review the assumptions behind your hourly or daily labour cost calculation to validate they are still correct. Allow enough labour costs by building in difficulty factors for jobs that are not continuous, or new build, or in listed buildings or for work at height etc. Buy subcontract labour at a fixed price for the job.
8. During the job, labour costs can escalate. Track the labour used especially on larger jobs. Have sign off controls for extra labour purchased. Assign engineers to the job with the right skills. Motivate and manage the engineer to finish the job to the right standard and in budgeted time.
9. Consider the cost and use of purchased services e.g. office supplies, IT, telephony and maintenance contracts.
10. Only buy product for resale when you have a customer order.
11. Determine what activities are core to your business, where you want to develop a core in-house competence. Then look at what you can outsource.
12. Of course, people are the biggest cost in the business. Consider how productive is your investment in people? Start by making sure your management structure is appropriate for the size of your company. As companies grow they can end up putting in place too many managers. “Too many chiefs, not enough Indians” comes to mind. Pay attention to the spans of control of all the managers (six to ten direct reports are appropriate in most instances).
Discover all 19 actions in the September 2017 edition of PSI magazine