Obviously, making money is important to businesses; however, primary focus for increased profitability is often given to cutting costs.
Initially benefits can be achieved with a cost-savings strategy, but, after low-hanging-fruit is harvested, the benefits from this effort can be detrimental to the long-lasting health of the business.
In contrast, organizations experience lasting benefits when they use a business performance management system with a roadmap that helps their business revenue enhancement efforts.
The question about how to make money may be more easily answered by increasing revenues; however, this instinctive solution is not as easy as it may appears. Achieving an increase in revenue only becomes sensible if this effort results to elevated profits.
Business Revenue Enhancement in Five Steps
So, how can businesses improve their revenues without affecting profit margins negatively? Described below are five suggested steps. These steps are a portion of an enhanced business performance management system, which will later be described as part of an Integrated Enterprise Excellence (IEE) system business performance management approach.
With IEE, focus is given to determine what should be done differently at the process level to improve the top line, not for only making money this quarter, but for long-lasting growth and profitability. IEE gives focus to business revenue enhancement while holding down selling, general and administrative (SG&A) costs.
Step 1: Assess and Analyze Profitability and Business Components
Make time to assess the operating margin and gross profit margin of your business on a periodical basis. Then, compare these numbers to the highest-ranking companies in the same or a related industry. Doing benchmarking through this method will help businesses determine improvement opportunities that can lead to business revenue enhancement. This should be accompanied by a review of the profitability of the different business areas like the following:
- Individual services or products
- Individual jobs
- Business lines
- Geographic locations
Doing this will let businesses identify zero in losers or winners, so that it pays to analyze individuals components.
Step 2: Review Options and Construct a Plan
Businesses should consider the actions they should take in order to boost profits. The options might be decreasing costs, removing unprofitable clients or products, or having an increase in prices. Thorough assessment should be carried out for every alternative including making scenarios for all possible outcomes. Once the best options for enhancing the profitability of your business have been determined, businesses should come up with a work plan to implement the decisions.
Step 3: Stay Away From Discounting
Discounting may be a famous strategy used by businesses to improve sales. However, it can be a tactic that can turn into a habit which could have a huge impact on profit, since much more product sales may be needed to compensate for the discount. This does not help business gain more profit since a business may, with this strategy, only get back to the place prior to the time when the discount was placed.
One estimate is that only 15% of clients base their purchase on price alone. With this in mind, businesses should show why their services or products are more worthy than those of competitors. Therefore, increasing instead of decreasing prices could be a worthy strategy for businesses to systematically achieve business revenue enhancement.
Step 4: Determine Low Margin Clients and Waste
Not all customers are really good customers. Businesses should be able to distinguish between the profitable and the not-so-profitable clients in their business revenue enhancement effort. This is an incredible way to increase revenue and total profit margins. Once the low margin clients are determined, eliminating them can lead to cost reduction with mild effects on income. This will also free up resources and time in order to dwell on customer services and promotions to good customers.
Also, inefficiencies are present in businesses. Decreasing these can enhance profit levels. Business waste can take as much as 30% of the entire business operation costs. If a business is spending $500,000 on operation cost, $150,000 could be the profit waste. It will be significant to identify the waste in the business and remedy the situation.
Step 5: Set Targets and Do Follow-Up
Every business is different. Based on the options taken, realistic targets should be established for areas of the business that have the most whole-enterprise benefits. The efforts to improve the business performance metrics should involve process improvement efforts that are long lasting to the business measurement.
Intense follow-ups every quarter should be conducted to ensure that the plan is staying on track relative to these process enhancement efforts or identify and make changes on the plan of action when necessary.
The main component to obtain success for enhancing business profitability is to make sure all inputs to services and products are subjected to appropriate costing systems. Moreover, businesses should have a better understanding of why customers should buy their products or services. This will assist businesses in identifying the most feasible options for elevating profits. These could be instances like the decision to get rid of unprofitable services or products that may lead to customer loss. Or, a business might come up with an increase in price on their products’ perceived value over what competitors offer.
The rule here is to determine the things that set your business apart from others. It is entirely possible for a business to increase prices and gain more revenues without affecting profits negatively.
Business Management System Roadmap
The above five steps for business revenue enhancement are a part of a 9-step enhanced business management system that integrates predictive business performance metrics with improvement efforts resulting in business revenue enhancement with increased profitability. This methodology provides an enhanced integration of process improvement efforts with a business management system (BPM) so that the enterprise as a whole benefits.
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Have questions or feedback about the five steps? Your comments are welcomed below.