How to Make a Profit

At two recent consulting gigs, where the enterprises were in financial difficulties, I began my routine focused interview questions with the executives.

I was blown away when I asked, first a business owner then a Company President, what their break even cost were and in conjunction with that what the average profit margin was by Stock Keeping Unit (SKU).  All I got back both times was a “deer in the headlight looks.”

Got any feeling what that’s like?  Was I speaking a foreign language or was this some kind of “out of body” experience?

Later, in the same focused interviews, with Sales & Marketing the responses were consistently about the #1 customer and the “best sellers” in the portfolio.  Never once did they mention profit margins!

I began thinking about shooting myself, after all, how was I going to turn around this company if everyone thought they existed for the customer rather than making a profit and paying the bills for the company?  Don’t get me wrong, customer satisfaction is very important but it’s secondary to making money!! PROFIT is what it’s all about.

There are some fundamental things that MUST BE ADDRESSED in turning around a company that’s losing money into one that is making money.  Here’s a real shocker for you:

First, find out where you’re bleeding money! (I’ve even got a list to jump start you).

• % profit by stock keeping unit (SKU) highest to lowest.
• % loss by SKU highest to lowest.
• Amount of money paid in overtime by employee.
• Cost of scrap in manufacturing.
• Cost of scrap in raw materials.

Second, call in your staff and present the facts of the situation to them.  At this time you’re looking for just a few things.  They are positive contributions and potential solutions as well as which of the staff members is “a lost ball in high grass” or “out to lunch” or “couldn’t care less.”  DO NOT ACCEPT EXCUSES.  Get proof!!!!

Third, you have tentatively identified those that need to be culled and those you might depend upon.  So make a couple of lists and call the staff in one by one.  Try to engage each and every one.  Make notes and begin backing up your impressions with facts.

Fourth, hand out assignments with specific to do’s and accomplishments with definitive end dates.  Evaluate the results.  Make notes.

Fifth, evaluate the amount of money spent on overtime.  My experience has been something less than a half dozen employees account for about 80% of the money.  Ask why. Cut it all off unless you personally approve it.  Almost always reject the request for OT.

Sixth develop an implementation plan.  Polish it up.  Present it to the key staff members, annotate the comments, and adjust the plan if required.  Assign action items to the appropriate staff member (authority & responsibility).

Seventh, look for replacements internally and externally for the identified weak links that cannot be rehabilitated.  Pull the trigger.  You haven’t a lifetime to do this.  This will only happen by revolution not by evolution.

Eighth, identify all external or internal visitors from corporate or sister divisions.  Put key card access door controls in place.  Refuse all access unless personally approved by you.  This should exclude the fire marshal, police, and emergency responders, of course, but believe me you must make the exceptions known.

Ninth, do a personal walk through of your plant every day.  Check locks, hasps, security on roll up doors etc.  Get a security team from within and lock up the stuff that can get “legs,” lock up scrap, and most of all secure the stockroom/warehouse/distribution facility.

Tenth, if you ship/transport via your own trucks, vans, etc. put lead seals on the doors of these units and make the warehouse/storeroom manager responsible for ensuring the integrity of the seals.

Lastly, look at the attached “break even” report and create something similar.  The effort here is simply to list items in descending order by percentage of loss of profit margin.  This quick and dirty study can take you from an approximately a $2M loss to about a $1.5M profit over a 2.5 year period depending on the size of your business.

So now what do you do with this “Break Even Report?”  Get your Sales/Marketing, Finance Groups together with Manufacturing and let them, as an Ad Hoc committee, make some tough decisions.  Think in terms of potentially losing a customer or at least stopping the loss of money.  If the enterprise continues to lose money it won’t exist to service the customer in the future.

The choice should be a simple one, you have must sell, at least, at your break even cost, drop the items from your sales catalog, increase your prices, or go out of business.  Let me say it a different way, be at least at break even or loose money!

Do you want to be a hero or a goat?  It’s not rocket science just look at the basics and don’t accept excuses.

Your path to business success.