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Profit Improvement Articles

Profit Improvement Articles

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What’s Stopping Your Business From Making More Money?

As an entrepreneur, you probably suffer from what Michael Gerber calls “busy, busy, busy”.

There’s always much more you which you could do…, should do.

But what really matters?

What is the main thing that is stopping your business from making more money?It’s an interesting question and it explains why I’m attracted to using the theory of constraints in my strategy coaching.

There are two techniques in particular from the Theory of Constraints Thinking Processes that we should talk about.

The first is the Prerequisite Tree.

This focuses your attention on the necessary conditions to meet your goal.

It’s particularly important for start-up businesses or those that have never performed well.

The idea is to focus on the individual things necessary for your success which together become sufficient.

It’s a bit like a jigsaw puzzle – you don’t get to see the full effect until every piece is in place.

But the jigsaw has been mixed in with other sets of pieces.

There are many things competing for your attention, but they don’t fit.

They don’t complete the picture.

The 1,001 other things you could do in your business take your time, attention and money but because they are nice to haves rather than must haves, they move you forward.

The Prerequisite Tree identifies the most important things to focus on and turns them into intermediate objectives.

We can find the items by asking “What’s stopping you from achieving your goal? Why haven’t you already done it?

The second important aspect of the Theory of Constraints Thinking Processes I want to focus on in this blog is the Current Reality Tree.

This works from the symptoms of your problems – perhaps not making enough money – and working back helps us to identify the core problem which will have maximum impact.

This is identifying the constraint.

And when you can see it, you can follow the Theory of Constraints principles and do something about it.

The constraint may be inside the business.

It may genuinely be a physical constraint – you could sell much more if only you could make it.

Or it could be a policy constraint. Unfortunately it is easy to get trapped by conventional thinking and do things because “that’s the way we’ve always done them” without appreciating the consequences.

Or the constraint could be out there in the market.

You could make more money if only you could sell more.

The Theory of Constraints has an answer for that too by developing what’s called an unrefusable offer or even a Mafia offer (think Marlon Brando saying “I’m going to make you an offer you called refuse” in The Godfather”).

This is the purpose of differentiating your business and explains my interest in the Theory of Constraints and the work of Eli Goldratt.

I recommend you take a look at this excellent book

The Logical Thinking Processes by William Dettmer

in 1 – Your KPI, 2 – Your Inner Game

Why Are Some Companies More Profitable Than Others?

There are two fundamental questions that business owners and managers ask all over the world:

  • Why are some companies and businesses more profitable than others?

It’s a great starting point for the second, and even more important question.

  • How can we this business or company more profitable?

Profit Or Sales

We know some people focus on the wrong issue.

They look to grow the top line rather than the bottom line in the mistaken belief that high sales revenue automatically leads to high profits.

That’s nonsense of course.

The biggest corporate losses in history come from giant businesses with huge sales revenues.

There’s a famous saying, sometimes called the Banker’s Mantra:

“Turnover is vanity, profit is sanity but cash is reality”

My advice is to forget all the ideas about mergers and acquisitions that create big businesses unless a very strong case can be made for much bigger bottom line profits.

Why Are Some Companies More Profitable Than Others?

This is the question that Professor Michael Porter set out to answer in his book, Competitive Strategy in 1980.

His answer was surprisingly simple although the answers led to some very cl;ever thinking on complicated subjects.

The most profitable businesses:

  • Operate in industries that are particularly profitable; and
  • Have big competitive advantages that mean they can capture a bigger share of the available profits than their competitors.

Businesses can make a good profit by meeting one of those conditions.

The weaker the performance in each dimension, the worse the business will perform so the most unprofitable companies:

  • Operate in a horrible industry; and
  • Have big competitive disadvantages which make it difficult to win business from customers or to service any orders profitably.

That’s why strategy is concerned with both the inside and the outside issues of a business.

It’s only by looking at both aspects that a business can map out the most likely route to profitable success.

What Can You Do To Make Sure You Have A Profitable Business?

Do you have a business or are you thinking about starting a business?

If you’re starting, you need to think about?

  • Is the market niche you’re thinking about entering an attractive one that can provide you with good profits or is it a potential profit trap? The Five Competitive Forces Analysis and STEP Analysis are good starting points.
  • When you enter this market, will you have a competitive advantage in terms of a differentiated value proposition or lower costs?

If the answer is No to both questions, don’t waste your time and money.It’s better to find another business opportunity that excites you.

If you have two Maybe’s or a Yes and a No, I think you need to think very carefully. Consider your options. Is this a market that you’re really committed to? Can you find a better niche? Can you find a business proposition and model that offers you the chance to have a competitive advantage?

A useful article to read is Will My New Business Venture Succeed Or Fail?

If you already have a business and it’s not performing very well, I think you need to ask yourself three questions:

  1. If the market is bad, can you find a more profitable niche or segment that you can move to with confidence? This is easier if you’re a general business who needs to specialise rather than a specialist who has a reputation in one field and needs to jump to another specialism.
  2. Do you have a competitive advantage that you’re not making the most of (it happens) that you can promote more extensively or can you development a competitive advantage (differentiation is usually easier than cost leadership)?
  3. Are things so bad that you need to leave this market by selling or closing the business? Sometimes a business that isn’t commercial viable on its own can become a profitable sideline in a better established business through synergies and shared costs.
in 3 – Your Strategic Positioning

The full title of this book by Kristen Cox and Yishai Ashlag is

Stop Decorating the Fish: Which problems to ignore and which problems really matter

In my review posted to Amazon.co.uk, I gave it 2 Stars.

Here is my review.

Nice idea, disappointing delivery

I thought this was a very good idea but, as soon as I opened the kindle book, I realised there is a problem. It’s not in the normal kindle format but instead, a two page pdf style book in landscape format. This has the advantage of presenting the diagrams and images fairly well but the disadvantage that the text was a little too small to read easily and I couldn’t highlight sentences of interest. [continue reading…]

in Other Business Books

What If Analysis – Cost Volume Profit

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

Understand The Financial Implications Of Your Decisions With What-If Analysis using the Cost Volume Profit Relationships

If you’ve worked your way this this Pillar 1 Module 3 systematically, then with what you know so far, you can start to look at the financial implications of some quite complex decisions.

Previously you’d rely on gut feel to make and worry about the possible consequences.

Now you can start looking at the facts and key assumptions and make a considered judgement, just like senior managers do in big businesses with full accounting and financial management support teams. [continue reading…]

in 1 – Your KPI

Reducing Costs

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

How To Reduce Your Costs To Improve Profitability

Look At The Detailed List Of Your Costs

First, if you want to reduce your costs, you need to know what you spend. It’s very hard to think about challenging your cost base when you’re doing it as a way of abstract thinking.

Your accountant or your computer system probably provides a detailed break down so take a look at it and challenge the big numbers first.

Seeing how the level of costs compare can be a big eye-opener. It’s very easy to agree to increase costs – an extra person, a salary increase, a price increase from a supplier or a new discretionary cost. [continue reading…]

in 1 – Your KPI

Your Profit Target Point

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

Use The Cost Volume Profit Model To Target Your Ideal Profit

You can use the same Break Even Point logic to target the Profit you want, by treating your profit target as a fixed cost.

Then you can calculate the sales needed to reach your target at your contribution rate assumption. [continue reading…]

in 1 – Your KPI

Three Ways To Make More Profit (Accountants)

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

How Accountants Tell You How To Increase Profit using The Cost Volume Profit / Break Even Analysis Model

The break even point model (numbers example link) makes it clear there are only three ways to make more profit.

The first way is you can sell more

We have already seen the impact of that in our numbers example. [continue reading…]

in 1 – Your KPI

Profit Gaps Example

We’ve gone through a lot of theory about profits and finance without having to resort to many numbers examples.

That’s about to change to help you to understand the Profit Gaps in your business. I do the best to keep the numbers simple.

Calculating Your Profit Gap – A Worked Example

[continue reading…]

in 1 – Your KPI

The Profits Principles by Steven Briginshaw

The full title of this book by Steven Bringinshaw is

The Profits Principles: The practical guide to building an extraordinary business around doing what you love“.

In my review posted at Amazon.co.uk, I rated it as a FOUR stars book which means I think it is very good.

Here is what I wrote.

A very good book packed with general business advice

This book is loosely written around the acronym PROFITS. This stands for Plan, Realise, Optimise, Focus, Improve, Tax and Systemise and, as you can see, this is forced and you have to learn how to interpret the individual words.

While I was reading it, I was hearing echoes of the classic small business guide, The E-Myth Revisited by Michael Gerber. This has the added benefit of avoiding that book’s syrupy writing style while providing more practical “how to do it” guidance. [continue reading…]

in Best Business Books

The full title of this book by Scott Hallman is

The 7 Success Drivers to HyperGrowth: How America’s Fastest Growing Entrepreneurial Companies Achieve Greatness“.

In my review at Amazon.co.uk, I rated the book at the FIVE Stars level, this means that I consider it excellent.

Here is what I posted.

Packed with important lessons

Many years ago, I bought an excellent audio training product by the author that provided detailed implementation advice for Jay Abraham style marketing and profit building strategies. Since then he’s been one of my favourite experts and I’ve been looking forward to the time when he publishes his first book. [continue reading…]

in 2 – Your Inner Game, 3 – Your Strategic Positioning, Best Business Books