Insights | Blog
Performance Improvement Entails Improving Margin
Based on our recent survey of over 1,000 middle market participants, CEO’s and their senior managers are seeking opportunities to improve revenue and margin. These two components require a separate, yet inclusive strategy as part of the company’s overall business plan. Growing revenue and improving margin requires a plan, time, money and persistence. For purposes of this discussion, let’s take a closer look at improving margin.
Margin improvement is a difficult task at best. Day to day activities require a lot of management time and attention. In addition, customers are seeking their own margin improvement by reducing prices paid to their supplier. Having said that, the blood, sweat and tears necessary to accomplish this objective should fall direct to the bottom line, thereby improving cash flow and business valuation.
Let’s review some initial strategies aimed at margin improvement:
• Refined Product Mix – It’s necessary to understand the gross profit by product or product line. This will help you identify the products or product lines you’ll want to expand or possibly contract. Business owners are often surprised to see that some products have a negative contribution margin (revenue less variable costs). These products require immediate attention because (a) Their unprofitable before considering fixed overhead and (b) Increased volume on these products only creates a bigger problem. The key here is having the necessary information to allow management to think strategically and allocate precious resources accordingly.
• Review Sales Channels / Volume improvement – Take a close look at your sales channels and ask yourself if there is a better way. Whether you are selling via wholesale, retail, on-line, sales representatives or direct, there are often alternative strategies to consider that augment your current approach.
• Inventory Management – Are the bill of materials accurate? If not, you’ll see variances when physical inventories and cycle counts are compared to the system generated inventory. There needs to be a “tight” relationship between inventory management, inventory ordering points, the movement of costs from inventory to cost of goods sold and the IT system that produces the information of this critical data. If not, the result will likely be margin fade, cash flow deterioration and lost profits.
• Efficient IT System – Is it fully functional and are your employees utilizing this resource to its full extent? The answer is likely no. The ROI (Return on Investment) on IT expansion is often lucrative and well worth the investment. At O’Keefe, we employ IT professionals with decades of experience in their field ready to assess current operating environments and develop strategies (within budget constraints) to fully leverage IT system into cash flow and profitability.
• Plant Layouts and Equipment Utilization – Because of the competitive environment today, many manufacturing companies cannot employ full time process engineers to analyze process efficiencies. As an alternative, we often provide process engineers on a project basis designed to drive the changes necessary to eliminate manufacturing costs and improve margin. Again, the ROI on these projects are lucrative and extremely beneficial to the organization.
Margin improvement projects require a time commitment and strategic resources that are often not available at companies. The key is inward examination while quite often, looking to outside experts for perspective and an action plan for improving performance.