7 LEVERS FOR HIGHER PROFITABILITY
Let’s talk about CASH and profits….
Sometimes we think our business finances are linear… if we raise revenues 1% or cut expenses 1% then this will impact our profit 1%.
However, they are not linear.
Did you know that a 1% price increase could increase your profit 3x as much as selling 1% more at the same price?
As part of the “Cash Flow Story” report that we use with customers, you can find out what the “Power of One” will do for your business.
Essentially, the “Power of One” calculates the impact after changes that increase the following items just 1%:
- Cost of Goods Sold (Reduce)
- Accounts Receivable (Reduce)
- Accounts Payable
- Inventory (Turns)
- Overhead Expense (Reduce)
For the sample company “Rebecca’s Coffee” with $6.6 million in revenue, a 1% improvement in those 7 items resulted in a 20% increase in profit…
and cash flow increases from a negative $193,000 (need to borrow) to almost positive cash flow (just reducing AR two more days balances cash flow at zero).
Even though Rebecca’s has $6.6 million in revenue, the current growth from $3.4 million four years ago burned cash and increased debt.
The business is only valued at $207,000– less than 4% of sales!
After the 1% improvement in those 7 elements in the Power of One, the business how has a value of $865,000– a four-fold increase. (Based on a standard multiplier of 4x profits).
You can see the whole sample report here: (Link to Rebecca’s Coffee Cash Flow Story sample report here).
Of course, with a few strategic changes you can influence the Power of One factors much more than 1%.
For example, after a change in how the contact center handled incoming sales inquiries, one of my clients saw a 37% increase in volume the next month.
Another client changed their scheduling and simplified their production process to handle 40% more volume with the same staff and reduced their cost of materials, so their cost of goods shrunk 10% on the higher sales. They went from zero profits to a decent 10%.
So what is the potential in your business?
If you are curious what is possible to increase your cash flow and profits, just contact me and I would be happy to provide you a custom Cash Flow Story report.