Resource allocation / improving profit
How do you measure business performance? An enduring measure is profitability, because lots of activities happen in a business with the end result being profit (or the amount you receive above what you have paid out).
As a rule of thumb, if your business has:
- Net profit1 below 5%, it is on life support
- As you get towards 10% & over, your business is doing fairly well
- Over 15%, you have a strong business. The challenge is how to protect your business from new entrants to your sector
A company with improving performance give you lots of choices:
- Higher dividend payments
- Higher management bonuses
- Higher staff retention
- More public recognition of the skills/ability of the management team
- A higher sales price
- The ability to grow faster
The worse your business is performing, the more limited your choices become, potentially down to just surviving.
So how do you improve business performance? Most people’s first thought is to grow revenues and/or cut costs. Revenue growth increases the scale of the business, usually requires funding but it will still generate the same £x in cash for each £100 in revenue. Have you improved the business or just grown it? You are only able to cut costs so far (and there is the danger of cutting in the wrong areas and reducing capability or capacity). This will increase the £x in cash per £100 in revenue to a certain point and then you start damaging your business.
So what next?
Depending on your business, there may be many opportunities to improve performance. Focusing on improving resource allocation and investment decisions will drive far more sustainable improved performance. This increases the £x cash earned for each £100 in revenue. Some areas to consider:
- Pricing – price vs value given as well as the basis of what you price
- Product/service mix
- Asset utilisation
- Overhead efficiency
- Return on investment of any incremental spend
- Contractual terms
- Changing operations
- Marketing effectiveness and efficiency
- Sales effectiveness and efficiency
We have many decades of experience assessing the operational, marketing and sales effectiveness of companies, and identifying and delivering improved performance. We have increased business valuation in excess of £65m through our work over the last 6 years.
Contact us to discuss an approach that will help your business performance.
1 Profit before tax