Finding Money in Your Business
Making a profit has always been a challenge, but perhaps even more now.
Costs have crept up despite an inflation rate of less than one percent last year. Many businesses have seen higher expenses for operations, travel, materials, etc. Competition for skilled and motivated employees in a tight labor market have driven up wages.
Experts are forecasting about 2% inflation in 2016. It could be less if the price of oil continues to drop.
In many business sectors, price increases that mirror the annual inflation rate are largely unquestioned. Increases higher than inflation are more difficult, but possible when accompanied by a reasonable explanation to the buyer.
Sometimes, raising your prices to cover increased costs is not an option due to customer pushback or a highly competitive marketplace.
One Arizona-based aerospace and defense manufacturer requires that annual pay raises and increases in company paid health care premiums be funded from above-the-line cost savings. For example, if labor and benefits cost 5% more this year, then a corresponding savings must be identified and implemented.
Are you ready for a homework assignment to identify at least a 5% reduction in your operating costs?
Before we start, let’s think about what you might do with the savings.
- Drop it right to the bottom line
- Employee training and skill development
- Fund pay raises or performance-based bonuses
- Hire a new employee
- Invest in marketing
- Invest in research and development
- Purchase needed equipment, software, etc.
The process functions best when your employees are active participants in this scavenger hunt. Create a Tiger Team, one person from each functional area, to identify ways to reduce hard costs within their area.
The Team reviews each idea and quantifies the potential annual savings, being careful that the reductions do not negatively affect product quality, customer service levels, employee engagement levels, etc.
Identifying ways to reduce costs should be an on-going exercise to maximize your profitability.