It’s pretty safe to say that most business owners would love to improve their bottom line profitability. The question is: How should they go about doing it? Let’s take the approach a “turnaround executive” would likely take if asked to fix a landscape company’s bottom line.
Reduce Fixed Costs. Start with immersing yourself in current financials. Take a hard look at every fixed-cost item and ask yourself: How does it help generate revenue, increase quality and/or reduce cost? Identify every line item that does not adequately answer that question, and then think about whether or not those line items could be eliminated. If a line item can’t be completely eliminated, find a way to cut it by 10%. The next step is to figure out if you can cut all fixed costs by 10%. But definitely start with the lower-hanging fruit.
When you embark on this fixed cost-cutting mission, hold a meeting with your key managers. Share your fixed-cost analysis, tell them what must be eliminated, assign each a budget, and set the goal for a 10% cost reduction. And don’t be afraid to ask for input on the cuts. The more involvement and buy-in you have from your managers and employees, the smoother this process will unfold.
One other thing that can happen during this step is to evaluate your cash flow. You want cash coming in faster than it is going out. Here are some things you can do:
- Pay bills (accounts payable) immediately to take advantage of discounts. If you can’t do that, pay at the latest date possible without penalty.
- Actively pursue accounts receivable and move everyone to less than 30 days. If you can’t do that, look into factoring the accounts, which is selling your receivables to a third party for a certain percentage. That’s better than not getting paid at all or even dragging things on and on and spending tons of time chasing after late-payers.
- Double your inventory turns by switching to a Just in Time (JIT) inventory system. It doesn’t make sense, especially if you’re strapped for cash, to tie up a bunch of cash in piles of mulch and pavers, etc.
Reduce Variable Costs. This is really about product/service quality. How efficiently do you schedule the use of resources across projects? How efficiently are individual projects managed to ensure they are delivered on time, on spec and on budget? How well are employees looking for and finding waste in the jobs they do?
Target a 10% cost reduction or productivity increase for each area. Map the core processes and eliminate waste and non-value. You might think that 10% doesn’t sound like much. But the accumulative effect of this exercise will blow your mind!
Next, assign true costs in each step of the process to determine the most and least profitable products, services and customers. Raise prices for at least your least profitable services. As for your least profitable customers, if you can’t raise their prices, let them go to the competition.
Now you can focus on your most profitable products, services and customers—and that’s going to drive bottom line performance more than anything else.
Alternative Math. Let’s change how we think about corporate finance. The common formula is revenue - expenses = profit. This is correct, but implies that profit is an afterthought, simply what is “left over”. This is the wrong mindset.
What if you managed your business with this mindset: profit - taxes = expenses?
You could open three bank accounts:
- Profit Account – predetermine your profit and pay it first
- Tax Account – accurately determine your tax burden and pay it second
- Expense Account – this is whatever is left, what it costs to run the business. If this third account has insufficient funds, go back to the beginning (fixed and variable costs) and fix what you have to in order to make the numbers work.
The bottom line is that you have to approach running a business like an investor or turnaround expert. When you bring discipline to your organization with a focus on increased quality, increased productivity and decreased costs, increased profitability can follow.