Is it Time to Change in 2014? Three Ways to Improve Net Profit
Let’s talk about three ideas that can improve your 2014 net profit. These are ideas that you can kick off January 1, 2014. They’re all doable and they can save you and your company some significant dollars.
The first idea is to address the issue of the yearly increase for the insurance premium that has been coming and increasing every year. There are three groups that are involved in the yearly premium increase - the company owner, the insurance agent and the employee group.
The company owner is the one who is generally tasked with paying the premium for the entire policy. Most owners are usually overly protective of their employees and want to treat them as family members. As a result, they tend to pay for more than what they should pay. If they were not considered family, the owner would be more likely to let them pay their fair share, as opposed to the owner picking up all, or a good portion of the employee share of their premium.
All of that being said, employees are very important to the company, but there are limits as to how much the company should or can provide for them. The easiest way to address the issue is to think about an employee’s compensation plan as a pie. The employee gets their entire pie, because that was what was agreed to between themselves and the company. No less, no more. So if an additional expense comes along, the employee and the company can discuss the additional expense and decide what to do about it. Under no circumstances should the company not allow the employees to participate in both the discussion and the economical experience of the additional cost. I would suggest that all concerned have skin in the game. The insurance agent is happy either way - they are getting an increase in premium at your expense. All other costs that involve the employee(s) should be treated in the same way.
The second idea to address is decreasing your overhead. Let me use a real example. A client was setting a goal for 2014. His existing overhead was projected to be $890,000 through December 31, 2013. He agreed to cut his overhead by 5% in 2014. After much discussion regarding how he would accomplish the 5% decrease, he decided that he would instead decrease his overhead for 2014 by $45,000 - a tad more than 5%. He then had an exact number that he and members of his company would be held accountable to get done. The company members will be asked to accomplish how each of them can play their part in a 5% reduction in expenditures that they are each responsible for.
So let’s use an example that is pretty typical of most companies. Let’s talk about a simple reduction of electricity - by 5%. When you leave a room, knowing you are headed out to the field, would it make sense to turn the lights in your work area off? Would it be possible to turn off the little heater that you have under your desk? Would it be possible to turn off any of your electronic tools that you use for work? The first thing that any of us are going to ask, especially employees, is: “What’s in it for me to help reduce company costs?” Well, there are several responses that come to mind, but how about the fact that the company is going to save money. When the company saves money, it allows the company to generate higher profits. Increased profit gives the company many options for future business and future growth. Without profit in the company, the company is an undesirable place for all employees.
The third idea is to address improving accountability throughout the company. Let me run three simple ideas by you:
- Arrange to give each employee a performance review within the first 60 days of 2014. This review needs to be based on how well they performed in 2013 regarding their written job description. This will set the bar for what their expected performance needs to be in 2014. The process of reviewing each member of the company should be done on an annual basis.
- Discuss with your field employees the need to be on time and on budget for each job they do. The on-time and on-budget numbers are generated from the estimate that has been completed with each job. By meeting weekly to review how each job budget is progressing, intelligent adjustments can be made in the best interests of job profitability. This process needs to be done on all jobs.
- Set an upfront contract with each member of the company to give them a compensation adjustment review in July and August of 2014. This needs to be done on a yearly basis and conducted separately from the performance review. The most important concept that each employee needs to understand is that compensation can go up, it can stay the same or it can go down based on the performance of the employee. Each individual needs to be judged based on the jobs they have worked on and that they have completed over the last year. If they brought their jobs in on time, they get to keep their job for the next year at the same pay. If their jobs came in early and under budget, reward them with some of the savings the company saw as a result. If their jobs came in late and over budget, I would suggest that you write them the best letter of recommendation that you’ve ever written… then walk them over to your competition.
We’ve just gone through three straightforward ways to get your costs down. Give them a try - it’s worth a shot to improve company profitability. Here’s to wishing you a happy and profitable New Year!