OK, so not all of them are a complete surprise… but most of them are rarely considered and could be having a significant impact on your drive to increase profits, assuming that is your goal. This list has been derived from the key takeaways of the previous articles in this series, demonstrating that executive level decision making can influence profitability, enhancing or impeding operational efforts to increase profits and profit margins.
In this article, I won’t go into the reasons behind the takeaway or strategy suggestion, as that has been dealt with already. I’ll just headline the takeaways.
Here goes in order of the preceding articles:
- Manage receivables downwards as low as possible – normally a cashflow consideration but also associated with higher profitability.
- Likewise, keep stock, inventory and work in progress as low as possible without running out. Contingency planning is essential to make this work.
- Offer small discounts to customers for early payment.
- For the same reason, ask suppliers for a discount for early payment – it’s in their interest as well as yours.
- Keep enough cash in the business to trade through a downturn, but not too much, as that is associated with decreased profitability.
- Use debt to fund growth judiciously – and don’t take on debt to fund growth plans you wouldn’t honestly invest in yourself.
- No debt may be a sign of risk-aversion and could stunt growth and profitability. Ask yourself if you’re being too risk averse.
- Add staff cautiously after assessing the positive and negative impacts on profit.
- Ensure all productivity-enhancing initiatives are followed through with the promised reductions in headcount.
- Add non-profit generating staff with the clear intention of future growth, service improvement or sustainability. Cutting the fat in times of hardship is painful – don’t put on the weight in the first place and you’ll likely be more profitable.
- Mergers and acquisitions are rarely as successful as predicted – be wary of vanity acquisitions.
- Factor in the long-term costs of acquiring fixed assets – is it still profitable to acquire them?
- Too many shareholders or too many shares may spoil the profits.
- Precisely define the goal of introducing new equity capital and ensure it accommodates the associated downward pressure on profitability.
- Pay your creditors on time or early – it is associated with higher profitability.
- Take on manageable debt to fund growth and acquire profit-generating assets; preferably do not take on debt for cashflow.
- Success may lead to riskier projects, reducing overall profitability.
- Focus on organic growth: growth funded from cashflow – slower organic growth may be more sustainably profitable.
- Invest in non-balance sheet items, e.g. R&D.
- Pay as small a dividend as possible balancing the business requirements for cash and reinvestment with shareholders expectations of their ROI.
If your goal is to increase losses, then applying the opposite principles would probably work. You might wonder, who would do that? Apparently, it turns out that, energy retailers would, as discussed in a previous article. It also turns out that standard practice in that sector is often the opposite of the items in this list. For example, item 3: “offer a small discount to customers for early payment”, turns into “charge a premium price for early payment”. This is exactly what happens with pre-payment meters: credit customers are charged a lower unit price than pre-payment customers.
So is it any wonder that retail energy suppliers are in crisis – they have their priorities all wrong to run and build sustainably profitable businesses!