Managing and building a business is challenging and only a minority in any industry becomes super profitable. Even fewer are set up to be operating without the owner needing to work in the business. These outcomes are some of the evidence businesses can benefit from a business mentor.
There’s one, strong indicator of a business’ ‘health’ that can be used for all established businesses of all sizes – beyond the solo-operator stage. This one indicator is a figure that not all company owners are aware of, or its importance and it’s the one that a good business mentor can assist to improve.
That figure is the operating profit margin, or the percentage of revenue that is the operating profit.
Owners and managers strive to increase profits however their focus tends to be on increasing leads, sales and profit by increasing revenue.
A large number of companies in the world are struggling, not from a lack of leads, sales or revenue but from a relatively low operating profit margin.
Increasing the figure, without increasing leads or revenue is relatively easy, when certain proven principles are applied.
If the operating margin is under 10% that is below what is considered a ‘good benchmark,’ by a leading business mentoring company Profit Transformations.
Head of the company, Tim Stokes recommends a ‘benchmark’ or target figure of 15% as the minimum, even in industries where averages are 5% or 8%, because that’s where a business seriously increases cash levels and reserves in the bank after all costs are paid.
To achieve a higher figure requires a very different way of thinking, because if you want a radical improvement, you need to think radically different.
Innovation not duplication is required, and that has to begin with a desire to be willing to accept and embrace changes in the organisation. The more things one changes and improves in a company’s operation, the higher the percentage profit can go.
With all change, the first step is identifying where the point of origin right now. This means very comprehensive measuring of all activities business involved with…
- Generating sales 2. Carrying out the work of the sale, and
- Being paid for the work
These 3 are the primary functions of any business, which can and need to be measured and reviewed weekly.
Comprehensive measuring activities of these functional areas are where inefficiencies and variables are identified. For example, measuring each sales person’s conversion rate percentage from leads to sales, and seeing the difference in performance between salespeople, identifies opportunities for learning and improvement.
Measuring work/jobs to determine gross margins will reveal variations of profitability on similar jobs and insights into how to improve the figures and employees carrying out the work – when technical employees carrying are factored into the Cost of Sale.
Measuring in a way to segment the services into types of work (which customers of the business want) is very beneficial especially when all jobs are accumulated for a month. This reveals what the range of gross margins is, from the highest to the lowest.
When the range is seen, the lowest figure that pulls the whole down is known by the type of work. If the average operating profit is low (under 10%), then low gross margin service work is creating a loss overall.
The Profit and Loss Statement shows the average percentage figures, not the range, so segmenting a business into its types of work and then measuring by work type is usually revealing – and often shocking. It creates profit increasing opportunities that can be very significant.