When you ask business owners why they started their companies you get a variety of answers – personal satisfaction, freedom, security, create a legacy, control, responsibility to community, family and money. People start businesses for a lot of different reasons and goals.
No matter what your reasons were for starting your business you need money to stay open and achieve your objectives. Want freedom, you need money. Want a legacy to pass on to your kids, you need money. Want to control your workplace, you need money. Want security, you need money.
Want money? Then you need to understand how to make it.
This is where profit engineering can help you. Simply put, it is a way to financially stabilize your company by making a steady, predicable profit. Too often business owners look at profit as something they have no power over. It is what is left over after all the bills are paid.
Profit should never be an afterthought – it ought to be well defined and tracked (engineered) from start to finish. A business is made up of a number of systems, which must work well together to create a financially healthy company. You have a lot more power over these systems, and their role in the company’s success and prosperity, than you think.
When was the last time you took a clear-eyed, comprehensive look at all of your systems? If you are like the majority of owners the answer is never. It is time to start if you want to achieve your goals. Answer the following questions, and use the information to begin engineering your company toward profitability.
- What was your Gross Profit last year? What is it YTD? Based on national averages for your industry what should it be? When was your best year, and what made it better?
- What was your Pre-tax Net profit last year? What is it YTD? Based on national averages for your industry what should it be? When was your best year, and what made it better?
- What Pre-Planned Profit or Profit Engineering ideas and systems do you use? Why and where (i.e. inventory, productivity, sales, employees, products, services, quality) are they successful? Why and where are they not successful?
- How do you build profit into your sales/bid process? What percentage do you use, and how do you calculate it? What percentage do you actually end up with, and how do you calculate it?
- How much do you add for burden and overhead?
- What limits do your sales people/estimators have in adjusting profit margins? Do you know the profit on each sale or bid they make?
- Which budget style (flat line, variable or indexed) do you use to control profit? Why?
- How much profit do you want? How much is reasonable for your industry, product and service? Where exactly in each process and system are you adding it in?
Engineering profitability takes time, commitment and know-how. But, the ROI is worth it. It is the difference between getting all the things you wanted when you started the business, or not.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: