Producing the highest profits

by Laddie Blaskowski

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Whether you provide a product or service, the goal of your business is to produce the highest possible profit on each sale. Sales do not necessarily equate to profits, but it’s easy to lose sight of this rule when the excitement of another big sale is looming.

To ensure that your sales do turn into profits, you should evaluate the reasons money is spent. By analyzing all expenses, you can determine how they fit together, the “true” cost of your products, and how to optimize profits.

So where’s the money?

Evaluate the cost of sales. Making money begins with controlling the cost of production. To find ways to increase your gross profit, all three aspects of the cost of sales (labor, material, and overhead) need to be evaluated for refinement.

Begin with your labor force. Does the income received from your products offset the workers’ costs, including benefits and taxes? Time studies, with employees recording where their time is spent, can help you determine this. If your labor costs are too high compared to the sales prices, new ways to complete the process need to be found, labor costs should be lowered, or the product or service should possibly be discontinued.

With inventory systems available on most off-the-shelf accounting programs, it’s easier than ever to understand the costs associated with materials. This information can be used not only to evaluate the cost of materials, but also to measure optimal ordering quantities, financing costs, and losses resulting from waste.

Control operating expenses. Creative thinking can often lead to substantial savings. For example, it might be possible to renegotiate your lease, rent out unused space, or find a new location. Or the cost of a receptionist might be eliminated by leasing a voicemail system—with an added benefit of increased efficiency throughout the company. Every cost, from bills to office salaries, may need to be regularly reviewed.

Downsizing. Rightsizing. Cutting the fat. No matter what it’s called, the objective is to keep personnel expenses at the correct level for your current sales. The decision to let an employee go is a difficult one, but it’s important to keep personnel expenses in check and not let them grow out of control.

To reduce operating expenses, review every line item on an individual basis and consider how each expense could be lowered. When reviewing salaries, analyze each person’s role to determine whether customers could be billed for employees’ time (as in the case of paralegals) or whether these costs should be considered in the cost of sales.

Manage taxes. An old rule is still true: “It’s not what you make, it’s what you keep.” Managing taxes is just as important as any other cost. If you wait until the last week of December to do your tax planning for that year, you will surely pay more in taxes than necessary. Planning for the year should begin in January of the new year,and tax ramifications need to be part of each major decision.

Ben Franklin said it best: “A penny saved is a penny earned.” And, those pennies can make the difference between average and excellent profits.

BusinessTruth: Increasing your profits is not as hard as it may seem.