If there is a silver lining at all to COVID-19’s effect on industry, it’s that its forced managers to re-evaluate their profit margins. Striving to optimize profitability has never been more of a factor in financial endurance as it is right now. Handled correctly, the changes implemented to survive financially during COVID-19 will reap its greatest benefits once the worst of the pandemic is behind us. The good starting point in a reassessment is to disaggregate the components feeding into company margins and identify those reaping the greatest rewards. There are several ways to dissect and capitalize on profitability streams.
- By customer: As a rule of thumb, analysts estimate that the top 20% of customers generate approximately 120% of company profits; and the bottom 20% account for 100% of losses. While it feels counter intuitive to many business owners whose mantra is to grow a customer base, culling your revenue pool is probably one of the quickest ways to improve profitability. Start by identifying which customers belong in the top, middle, and bottom buckets. Which of the poor performers can be renegotiated, and which need to be let go?
- By product: Unless a manufacturer produces a single homogenous item, there will be variability in margins by product. Managers that do not have visibility at this level do themselves a disservice. Identifying fixed and variable costs by product reveal which perform at or above expectations, and which hurt the bottom line.
- By distribution channel: How business owners get their products to their customers can have vastly different cost structures. How much does it cost to use traditional wholesalers, regional distributors, direct-customer avenues? Will there be repercussions to the business in upsetting the apple cart? Are there new opportunities in web-based sales?
- By supply chain: Time is money. Logistical challenges to get inventory in the door and through processing plays an inherent role in product costs. Examine the interface between engineering and production. Which products can be produced to QC standards, within budget, and put out to market quickly?
This self-examination may be borne of the need to stay afloat during these unprecedented times, however, it does create an opportunity. Understanding what truly drives company profit puts management in a position to devise and execute a margin optimization strategy. A focused plan based on relevant data will mitigate the financial strain of the pandemic and, even more importantly, fortify the business model in a post COVID-19 economy.
If you have any questions on how your business would benefit from a profit margin evaluation, please call us at 401-921-2000, or reach us through email or complete our online contact form.