Process Improvements Drive Profits

The title of this article could be “Does your company need a makeover of its internal processes?”.   That sounds like an episode of HGTV but it is really a good question for business owners because their goal is to maximize the value of their investment just as homeowners want to maximize the value of their homes.  With a business, however, the value of the business is greatest when sales are growing and profitability is increasing.   Companies that have the greatest valuations per dollar of revenue run like the proverbial Swiss watch and their internal processes get more efficient year after year.  The owners of these businesses have a relentless eye on costs and efficiency.  Yes, it is possible for a business to be growing and be profitable without such attention to detail.   It happens all the time.  Business owners are so busy going after sales, building product lines, etc. that internal processes get taken for granted.  For such companies and almost all others there is much room for improvement and for bigger bottom lines.  If not treated, inefficiency will get worse and will drag profits down.  Ultimately it can prevent a company from growing and even lead to its demise.

What’s a process makeover worth you may be asking?  Well, here is an example.  Assume a business has annual sales of $5 million, a net profit margin of 10% ($500K) and internal processes that have evolved over time.   If the margin could be driven up to 15% by streamlining processes, the business owner would see an extra $250k on the bottom line.  Would it be worth spending say $20k or so to get that kind of return and/or to enable the company to grow?    Of course it would, especially considering that the benefits of the effort are permanent and keep on giving, like an annuity.  It’s a no-brainer.

Note that process improvement isn’t necessarily about cutting costs or reducing staff.  It’s about getting more out of every dollar spent on internal processes.

Before talking about how to do it, consider one more significant payoff of streamlining internal processes – it can free up working capital that an owner may not even know is available in the company.  That newly found money can be used to invest in people, equipment, products, etc. to help the company grow.

So how do you do it?  First, find someone who has CFO experience and who has also been trained in process evaluation and process mapping.  Look for Six Sigma credentials.  Then, let that person discover how your internal accounting and financial processes are really working.  Peel back the layers of tasks.  Start with accounting and finance because those functions are intertwined with everything else in the company and will highlight issues with other internal processes as well.

Then, have the person illustrate how accounting and finance should work.  Get into the nitty-gritty and be specific!  Identify tasks within each process that should be monitored regularly and establish a process for monitoring them.  Review internal processes and their throughput regularly and always question how things are being done.  If the value of a task is minimal (or even counter-productive), get rid of it.  Look for cost effective ways to apply technology.  Is there a better way to do something?  Do it.

Lastly, get everyone in the organization focused on quality and efficiency and offer rewards or bonuses for great ideas.  An efficient, profitable company is good for everyone.

Do this and you will be on the road to maximizing the valuation of your business.

photo credit: Business via photopin (license)

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