Identify Exceptions to Increase Profit

If someone told you to identify exceptions to increase profit what would you think they meant? It may not be what you first think.

What Prompted this Thought

Actually there were two things that caused me to have this thought. The first comes from understanding what we notice. For example, in advertising and marketing an attempt is often made to make something stand out by making it just a little different. That could be done with shape, color, size or any number of things.

The second thing that caused this thinking process was the 80/20 rule. I’ve used this rule in a number of prior articles and it continues to stay on the forefront of my thinking process for a number of reasons, the main one perhaps being how it helps identify what matters most.

An Example in Sales

Imagine you have a company that sells 100 different products. If you use some simple analysis you will notice that certain products are exceptions to the expected sales. They either far exceed or fall far short of expectations. For that reason they stand out. The 80/20 rule will show that the first group is part of the approximately 20% of items that account for about 80% of sales and the ones that fail to meet expectations are part of the 80% of items that comprise only around 20% of sales. This tells you where you have the opportunity to focus on products that are succeeding and push them more. Likewise it tells you what products you can look at dropping from your product line or perhaps modifying to improve their sales. Can products be bundled to improve sales? In both cases you identify exceptions to increase profit and in the process simplify your business.

An Example in Expenses

It is extremely important to analyze expenses on a regular basis. When you do this certain expenses will stand out as consistently too high or as growing at a rate that is not sustainable. With this knowledge you can take corrective action to bring these in line with the results you seek. Just as with the sales example you identify exceptions to increase profit. That doesn’t mean the other expense items don’t matter. It simply identifies the best opportunities to improve your profit. You can see more on this in the article 80/20 Expense Analysis.

This is also applicable to deciding what customers offer the most opportunity and which ones you would be better off without. For example, those exceptions of customers who always pay late may not be worth the effort. What about the ones who always have a problem?

The question now is whether you are being deliberate in identifying exceptions throughout your business that represent opportunities to improve your profitability?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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