A 1% difference in key areas of your business will make 30% difference to your bottom line and return on assets. Here’s how you can do this with your business in 2019.
From the annual accounts take a look at the eight primary drivers of business performance – price, volume, direct costs, indirect costs, inventory, debtors, non-current assets and creditors. These are the drivers of Earnings Before Interest and Tax (EBIT), and Return On Net Assets (RONA). Other balance sheet factors (shareholder funds, term loans and bank account cash) can all be set aside as they are not part of the trading performance.
In the example below the relationships of these eight, to EBIT and RONA is shown and the power of making only a 1% adjustment to each one reveals why these numbers are such influential drivers of business performance.
Changes of only 1% working in concert with others produce significant improvements in EBIT and RONA. This is something that you can achieve and is an easy project to sell to your staff. Of course you can target bigger than 1% changes and create even more dramatic improvements. Now let’s have a look at some of the ways you could make these changes to each of the eight key factors
Price needs to reflect value, so focus on changing the market’s perception of value and work at premium pricing your product or service. Innovate around the product and the customer experience.
Create innovations in your channels to market using social media and viral marketing. Double your market over night by opening distribution into Melbourne – (population 4.2 million).
Get into ‘Lean’ business methods and tools (see www.managementsupport.com). Redesign your business processes to take advantage of eCommerce and save time and cost in everything you do. Eliminate non-value-adding steps in the process.
‘Lean’ methods and tools can help here as well. Eliminate waiting time and aggregate similar activities together. Also don’t forget to empower and engage your people to gain the synergy and productivity of high performing teams.
Always know who owes you money by producing regular Aged Debtor lists – and then phone them each week to get the cash coming in.
Use ‘Lean’ methods to reduce process cycle time. Reduced process time will automatically reduce inventory and work-in-progress in service companies.
Non Current Assets
Measure your asset utilisation rates. Divest non-core assets and rent or hire others that you don’t use often.
Engagement yourself in supply chain management. Actively build relationships with selected suppliers and negotiate more ‘friendly’ credit terms.