How Can I Make More Profit from Each Project?

Profit comes when sales exceed expenses. Simple? You know better, and so do we.

It can be quite complicated to assess your revenue, and the marketing and sales efforts that generate it. We told at least one company to quit making certain types of sales and their profits increased. This happens when the marketing and sales cost, including human resources, exceed the gross margin on those sales.

In examining revenue-generating efforts, you compare the expense involved to the margin on the sales generated. The classic mistake is to compare the cost of a marketing campaign to the sales generated, but if you're reading this, we doubt that you will make that error. But, even careful managers often forget to include the ancillary costs of making a certain kind of sale: customer service, commissions, warehouse fees, and collections are commonly overlooked.

There are other expenses that are simply the cost of doing business. The technical term is overhead. Here, the classic mistake is to cut overhead to the bone thoughtlessly. Unfortunately, some items make a huge difference in the efficient functioning of your company. The key when assessing overhead expenses is to look for a return on investment from a reduction in other expenses.

Distinguish between core operations and incremental ones. Core operations need to contribute more than their direct costs plus overhead. Incremental ones are profitable if their margins exceed their direct costs alone.

Core operations are defined by their size (they're a major fraction of your business), and by their pertinence to your goals. Incremental operations are smaller and peripheral. Think of them as recycling your resources so that every little bit is used profitably.

For example, suppose you have a publishing company. You have set up a relationship with a sales force, a warehouse, etc. but you aren't using them to full advantage. If you take in distribution clients, that is a peripheral operation. If it is contributing only a small part of your revenue, then it is an incremental one, and you should be considering only the direct costs (including opportunity costs) when you assess its profitability.

Confused? That's reasonable. There are a lot of numbers to juggle. If you have a small operation, you can probably get by with a simple accounting program and spreadsheet-based analysis. (And we just happen to sell spreadsheet packages to help you.) If you have a larger company, feel free to contact us for further assistance.

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