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Sunday, 17 July 2005    
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Business performance in the real world

by Ahesha Perera, Asst, Lecturer, Department of Commerce and Financial Management, University of Kelaniya

This article addresses a number of ways to make sure you look after the bottom line. Having a good understanding of the key customer and competitor influences on your bottom line profitability will ensure that you keep your eye on the price rather than on the show.

Although it may seem exciting to go out and win new customers, before you do so, be sure that the profitable part of your current customer-base is not leaking away. In recent years research has suggested that, it is far more expensive to win a new customer than it is to retain an existing one. Make sure you strike the right balance between prospecting and retaining the customers you already have. Further, you should be clear just what each customer adds to your business, even if it is just capacity utilisation.

Having made sure that your company is not losing profit, by losing those customers, which generate that profit. Think, "profit now" but do not overlook the long-term profit potential of those customer groups, which may seem less attractive at present.

Profit streams

Know what is good for you and build your profit streams around this knowledge. Stay alert to changing habits and expectations within your market places but make sure that you major on those areas, which are good for you. Don't rush to innovate if you are not very good at it.

If the market is changing fast then you may need to change too. But the investment required will seriously affect your profitability. Before you innovate make sure that your existing products and types of customers are well serviced and that sales to them will be sufficiently profitable to support new directions.

Remember that some costs are the very things, which win you the business, and to cut them may only have a very short-term benefit on profitability. Being clear on just what wins you the business will help you to look at cost in a way that contribute towards long term profitability.

It will enable you to focus attention on the true relationship between cost and profits rather than the obsessive "cut cut cut" mentality, which can have serious consequences for the quality of your customer base. The simple truth is - be ruthless with costs, which do not contribute to customer value.

Although productivity gains can be accomplished through new equipment and better staff training/motivation, the former is often very expensive and the latter can take many months to show results.

However, significant results can be achieved inexpensively and relatively quickly through improved management control systems. Many operations are said to waste between 20% - 30% of their labour cost due to poorly structured management system. If you are paying significant levels of overtime, planning to take on more staff or simply need to reduce labour costs, now may be the time to check for lost potential in your system.

"No" it is not a misprint and "yes" of course you had probably lose sales. The question is how much would be lost and what real impact would this have on your bottom line. Despite conventional wisdom, price increases are not necessarily business suicide.

Customer benefits

Of course, even though you are aware that increasing prices is a potentially good way to increase profits, you must be very careful how you do it. Very few customers will really pay more for the same service, particularly if they can see a similar service elsewhere for lower prices.

What makes a price increase really works is not just because your suppliers cost have increased, or you think your product has improved, but because customers perceive your product or service has increased in value to them. The next time when you think about exiting new things, make sure that they have "will - pay - for" value to customers.

Sometimes, particularly in very competitive and innovative markets, it can be difficult to find new ways of doing things that will enable you to generate better profits. One way of overcoming this is to have learning approaches that could radically differentiate your business from competitors. Don't be tempted to restrict yourself to looking only at industries similar to your own. The best results may welcome from completely different sectors. You have only to look over the fence to find out!

Although most companies profess to value their staff highly. ('Human Resources', 'our biggest asset' etc.), relatively few seem to believe they could possibly have anything worthwhile to say about how the business should operate.

And yet staff can be a great source of ideas on what customers really want - they can tell you not just where you underperform but where the whole industry underperforms. Remember, the most secure profits come from meeting customer needs significantly better than your competitors.

Not every staff idea will be a winner, but then not all good ideas come from senior management. Remember, if you are playing "catch up" then sources of new ideas such as the business - to - business press and competitors will be sufficient to stay in the game, but for superior profits you will have to get the good ideas ahead of competitors.

Let them copy you for a change and you take the profit whilst it is there. Then ask all your staff for the new ideas-continuously innovates both in cost savings and most importantly in value addition.

Business plan

Any company that seriously expects to achieve consistent success will have a formal business plan. Naturally, all of this will be based on the very best information, (i.e. comprehensiveness, accurate and up to date) and be thoroughly considered, understood and 'owned' by all concerned.

According to General Eisenhower, 'plans are nothing, planning is everything' the real value of a business plan is largely in the process rather than the finished document. You need to consider any changes or developments internally and externally that could potentially impact on your future. Review your plans regularly to ensure they always provide an accurate chart to your future success. If you do not plan for profits, then hope for happy accidents.

These are the ten things, which will help you to ensure that not only do you stay in business but also enjoy above average profits in your market place. However, this information can make a critical difference to business performance in the real world.

References: Journals of the Institute of Management Services

ANCL TENDER- Platesetter

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www.peaceinsrilanka.org

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