Building a profitable business

Revenue growth and diversification of income streams are key strategies to build a successful and profitable business. However too often business owners, in their desire to meet sales targets or to simply win the work fail to maintain an acceptable gross margin. In extreme cases, this can mean that the business is working harder for the same or less return.

This issue is especially prevalent for businesses where comprehensive job costing is required before the project is priced for the customer.

Profit is quickly eroded when:

■ Materials are not accurately costed.

■ Labours hours are understated.

■ Consumables and travel time are not factored.

■ Inadequate stock management practices lead to obsolete stock, damage and write downs.

■ Lack of planning results in downtime or inefficiencies in how the work is performed.

■ The scope of the project is not clearly defined resulting in disputes with the client.

■ Errors or lack of training lead to rework.

■ Variations or additional work requested by the customer is not separately priced.

■ Discount to win the work. Improvements in the gross profit of a business translate directly to the bottom line. Small improvements can have a big impact.A 5 per cent improvement in gross profit for a business with turnover of $2m equates to $100,000.

So how could a 5 per cent improvement be achieved?

■ Maintain up-to-date price lists for materials. Consider having ‘preferred suppliers’ where more favourable terms have been negotiated.

■ Review charge-out rates of staff at least annually. It could coincide with the remuneration review process.

■ Summarise the labour required to complete the work and sense check this with project managers.

■ Effective capacity planning and scheduling. Ensure you have the right people doing the right jobs — junior staff performing lower level work. Senior staff supervising.

■ Effective training and development to minimise rework.

■ Quality control procedures.

■ Effective stock management to minimise stock obsolescence, wastage, damage.

■ Communicate with the client if additional work is requested — before the work commences!

Industry benchmarks can be used to assess the gross profit a business owner should expect. However all businesses are unique and a combination of strategies will be needed to achieve results. The business advisory team at Findex can tailor an approach based on your business needs. Contact your Findex advisor to find out how we can assist you.

Any information has been prepared without taking into account your circumstances. Seek professional advice before acting. While reasonable care is taken in the preparation of this information to the extent allowed by legislation, Findex Group Ltd NZBN: 9429036869831 (Findex), accepts no liability whatsoever for reliance on it.