It’s very common for a business owner to focus on their turnover or the sales they generate.
The mistake they make is not reviewing the business expenses. Increased profitability is not only achieved by higher sales. A detailed review of expenses can reveal wastage which, if fixed, can increase profits substantially. There are different areas in both manufacturing and the service industries to reduce wastage.
Here are six areas a small business can review:
It is very easy for a business to overproduce their product and have it waiting for sale. This can cause cash flow problems for your business due to the time delay to sell the finished product. You should only produce to a level that meets your current customer needs.
In the service industry, this could be caused by having too many staff on hand for the current work available. Having repeat client work coming in at set times guided by you, can mean less staff are needed and idle time is reduced. If you advise your clients when the work will commence and how long it will take, they will be happy.
Wait time and delays
Delays in the manufacturing process due to slow material delivery or contractors not providing their services on time can cause problems with meeting Customer delivery expectations. This means there are delays in sales being achieved and cash coming in and has impacts on your running capital and can cause customer discomfort.
For people in the service industry, delays can be caused by client information not being received when expected or not receiving all the information when requested. If you are constantly going back and forth with your client to gather more information, this results in extra time being spent on the work as it is being picked up on numerous occasions.
Having controls in place to ensure the information is provided timely and as expected will save you money. Staff prioritising will assist in effective workflow.
This comes down to the knowledge and skills of your employees and nature of your technology.
Do you have the appropriate staff employed? Do they need training to up skill? Your equipment and technology should also be reviewed. Is your equipment out of date and therefore too slow? Are you using up to date technology? All of these factors can result in higher costs of production.
In the service industry are you having a partner doing the work of an associate? Or is the associate too green for the work being done causing delays and rework.
Having too much stock on hand is costing you money. Are your stock levels in line with forecasted sales for the next two months? Idle stock takes up room and effects cash flow.
If you are in the professional services industry, high and old Work in Progress (WIP) can show inefficiencies in employees. Normally the older the WIP the harder it is to recover from the client.
Defects or Rework
There are two types of defects. Internal, which are defects found in the manufacturing process and external, found after the customer has the goods delivered. Both defects are issues that can cause time and material wastage. Often. it can mean delays in providing the product to your customer, cause a warranty claim or could mean a rework if the defect is found after delivery. This can leave a customer unhappy.
Your customer does not want to pay for transportation costs within the production process. This is a cost that needs to be minimal to ensure profitability. Removal of expensive subcontractors and the timing of deliveries to ensure only bulk deliveries are made and in fewer numbers will assist in lowering this overhead.
The above business areas provide examples of how, with the correct direction you are able to save on costs.
At RSM we can develop an action list to help you resolve each waste component of your business and improve your bottom line. Contact us now for a Business Improvement Review.