Profit margin magic using op efficiency to drive profitability v2
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13-Sep-2014 -
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Transcript of Profit margin magic using op efficiency to drive profitability v2
DIRTY LITTLE START-UP
SECRET #7
OPERATIONS EATS SALES FOR
BREAKFAST!
http://www.flickr.com/photos/matthew_norris/
too many entrepreneurs get hypnotized by growth
(volume or revenue)
when what really matters is margin
BUSINESS MODEL 1
Units Sold 1,000,000
Price per unit $1
Monthly Revenue
1,000,000
Monthly Cost 990,000
Monthly Profit 10,000
Profit Margin 1%
BUSINESS MODEL 2
Units Sold 100,000
Price per unit $1
Monthly Revenue
100,000
Monthly Cost 50,000
Monthly Profit 50,000
Profit Margin 50%
a million in revenue for a million units sold doesn’t look so sexy now, does it?
so how do we maximize margin
well it starts with some very basic math
let's start with the formula for profit margin
profit margin = profit
revenue
now let's do some simple algebraic substitution
margin =
profit
revenue
= (volume x price) – costvolume x price
= revenue – cost
revenue
= (volume x price) – (volume x unit cost)
volume x price
Expand out profit to (r - c)
Expand out revenue to (v x p)
Expand out cost to (v x c)
margin =
=
=
=
(volume x price) – (volume x unit cost)
volume x price
volume x (price – unit cost)
volume x price
price – unit cost
price
From the last slide
Simplify!
price
price
unit cost
price-
margin =
=
From last slide
price
price
unit cost
price-
unit cost
price1 -
holy cr@p!
profit margin =~
unit costprice1 -
in other words
selling more units (volume), does not in
itself mean your business is healthier
what moves the dial is…
1) raise price2) lower costs
but….
in most competitive markets, raising price
(especially significantly) is not an option
which means that
the magic of margin
is all done with cost per unit
that’s why sales & marketing is basically illusion and hypnosis
while operational management is the dirty little secret of success
so how do you reduce unit cost?
simple
process excellence
and how do you get excellent with your
processes?
you map out where your processes are weak or
inefficient
and you fix them
one at a time
i’d now like to share with you a tool that would be
used by you and your management team
to identify areas to target
but
due to the limitations of slideshare, you must download this deck to
make the tool work
please download and then view the next two slides in native power point.
it’s free.
here is a tiny version of what you’ll find on the
next slide
WARNING: you must manually use the scroll bars in order to use it
Cultivate Productive
Assets
Cultivate Productive
Assets
Produce Product / Service
Produce Product / Service
Distribute Product / Service
Distribute Product / Service
Administrate Firm
Administrate Firm
Operational Activities are defined as a set of business processes required to execute business strategy. Not all firms will have the same activities but they probably all have the same core of 4 and most start-ups and small companies will not be all that far off.
As a small company, you won’t have time to fix everything, but you should 1) know where you stand in terms of operational maturity (by mapping out processes as is the case here, and assigning maturity ratings) and 2) have a plan as to what things you will invest in improving. For example, you might target the “red” items in the map. Or you might find that you’ll get better ROI by focusing on 4 of the yellow processes.
Whatever the case, this is an example map (scroll left, right, up and down to explore) of operational processes that seem generic enough to me that they might be useful as a baseline for whatever company you are running.
Operational Activities are defined as a set of business processes required to execute business strategy. Not all firms will have the same activities but they probably all have the same core of 4 and most start-ups and small companies will not be all that far off.
As a small company, you won’t have time to fix everything, but you should 1) know where you stand in terms of operational maturity (by mapping out processes as is the case here, and assigning maturity ratings) and 2) have a plan as to what things you will invest in improving. For example, you might target the “red” items in the map. Or you might find that you’ll get better ROI by focusing on 4 of the yellow processes.
Whatever the case, this is an example map (scroll left, right, up and down to explore) of operational processes that seem generic enough to me that they might be useful as a baseline for whatever company you are running.
Activities mature and working smoothlyActivities mature and working smoothly
Activities are being performed, but there are opportunities to improve efficiency and/or effectivenessActivities are being performed, but there are opportunities to improve efficiency and/or effectiveness
Activities are not being performed, but should beActivities are not being performed, but should be
Activities are not being performed, but are not relevant for our business at this timeActivities are not being performed, but are not relevant for our business at this time
Scroll to see processes!
Scroll to see more!
what you need to do now
is duplicate this map with processes specific to your
business
(I bet I nailed 86% of them though)
and, as a management group activity, use color
post-it notes
to map out your own maturity levels
then, start actioning change
but remember…
focus on change that moves the dial on cost
per unit
don’t geek out on every opportunity….
good luck!
and make it fun!
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