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Increasing Revenue vs Making Profit – there is a difference.

Most company owners are happy to spend big money to purchase a shiny new piece of equipment in the hope to increase turnover by 2%, and profit margin by 1%, but ignore the fact that investing perhaps 50% of the cost of this new machine into a new “Business System” could provide significantly higher increase in profit margins.

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  • Why do company owners want to grow their company?
  • Companies want to expand to make more money right?
  • Will doubling your turnover actually result in more profit?
  • Let’s see…

Being in sales for more than 20 years, I have worked with thousands of businesses across many different industries. During this time, I have been able to benchmark many organisations around turnover, profit margins, overheads and direct administration costs.

It absolutely amazes me how often I visit a company that has grown significantly over the last 10 years, but the company owners are shaking their heads complaining that the company is making less profit now than when they were smaller. (I can see you nodding your head now…)

I have seen firsthand management get all excited after viewing a demonstration of a revolutionary new piece of machinery, such as a new Laser Cutter, instantly starting to generate a “business case” to purchase a new “toy” and expand their operation into the vacant building next door, hoping to make a “heap of extra money” in a market that they do not yet even “play in”.

Machinery sales rep’s typically have an easy job convincing customers to purchase a shiny new “toy”, to play in a new “sand pit”, with a bunch of new “children” that they have not yet met. And this is well before the customer has the correct sales staff in place to generate new business for the toy, staff employed and trained to use the new equipment, additional staff to process all the orders, staff to generate all the additional invoices and additional finance team members to follow up payment from all the expected “new” customers.

Two years after the purchase of the new piece of kit, one of two things typically happens:

  • 1. The new toy has indeed contributed a 22.5 % increase of revenue, but the company has now employed three additional admin staff members to send out all the estimates, process all the orders, create the invoices and run the now much busier despatch department.
  • 2. The sales team did not have the skills or desire to play in a new “sand pit” with children they are not comfortable playing with and the sales for the machine never really contribute the additional revenue that was planned.

At the time of the machinery purchase (or any other plan for expansion or growth) if the company had looked closely at the business systems they have in place, they may have found that by increasing the efficiency of their existing admin team and floor staff to process their existing orders and workflow, they could have easily coped with the additional workload generated by the expansion or growth.

A simple analysis of a customer’s existing overheads and a concentrated effort into reducing the cost of administration staff and processes can often result in a significantly higher increase in profit margin compared to those possible from a new piece of equipment or a plan to expand the admin in the business by renting the building next door.

It’s a fact that lean and efficient business will make far greater profits than one that is admin heavy, but how do you get lean and cut your admin staff or, even better, leave your existing admin overhead where it is and grow your business by 200%?

By working with a reputable business software provider companies can combine all their independent systems such as CRM, Accounts, Payroll, Inventory, Warehousing, Projects, eCommerce and Manufacturing into a single platform, significantly reducing the amount of paper and admin-heavy processes to run a business.

If you are not familiar with the term ERP, a truly integrated business system is often referred to as an ERP (Enterprise Resource Planning) system.

If you seriously want to increase your profit margins and run your business more efficiently, then the next time an ERP sales rep contacts you on the phone talking about “business systems” and “ERP”, don’t dismiss the call. Take the call, speak to them, listen to their advice and let their consultants come and visit your organisation to benchmark your company against hundreds of their other customers.

The best outcome of a visit from a consultant (initial visits are often provided at no cost) is that he/she gives you a medal for the best run company in the world; but the fact is that more than 95% of the companies that our consultants visit, have many non-integrated business tools, and such paper heavy/manual processes in place that all of them can benefit from a fully integrated system in some way.

A good, Cloud-Based Business System (ERP) can cost less per annum than 25% of the salary of a junior admin member (depending on your requirements), whilst also allowing a business to increase turnover by 200% without employing additional admin staff. Do I have your attention yet?

If you can tell me about a $20,000 piece of hardware or machinery that can increase your revenue by 200% without having to employ more admin staff, then call me now!!

Have a look around. How many staff are in your admin area? Look at the piles of paper, the years of records, the scans, the invoices, the manual processes (yes every company has them) and ask yourself “What would my profit margins have looked like if we expanded our business 200% over the coming years, but the admin cost did not expand at the same rate?”

Do the math, then do some research into a modern, cost effective, Cloud Based ERP System. But be warned there are a number of ERP Systems on the market that were designed 20 years ago and used by huge mining corporates. If you try to make these old and out-dated ERP systems work for a small to medium business, be prepared to spend an obscene amount of money to get it implemented and after two years you may end up with computer screens that look like you just flashed back to the 1990’s!

Make sure you are looking at truly cloud-based ERP’s with a modern architecture (not designed in the 1990’s then moved onto a server in the cloud… yes it happens… you were warned) from a local, well-resourced company that has a good reputation for rapid implementations and low ongoing costs.

ABOUT THE AUTHOR:

Scott Bryce
Scott Bryce
Business Development Manager

With an engineering background, Scott has worked with hundreds of organisations, across multiple verticals and industries, throughout the APAC region for more than 25 years. Scott’s experience includes ERP, Project Management, Hardware, Software, Cloud, CAD CAM, Manufacturing and IT Services. Now working with the team at Precise, Scott assists companies transition to the fastest growing Cloud Based ERP – NetSuite.

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