How Increasing Utilization Affects Profitability

Cash flow forecaster inside the cash flow management company

We’re going to talk about increasing gross margin. One of the best ways that you as a business owner can go about figuring out how to improve profitability without increasing sales. One of the best ways to improve gross margin is by increasing throughput or increasing utilization.

It’s easiest to talk about in terms of the manufacturing sector. Products get created in a manufacturing building. They go in on one side, and come out as finished goods. If products are being manufactured at a 100% efficiency rating, that means that we’re going as fast as we possibly can. But nearly no one is going as fast as they possibly can. If a realistic efficiency rating is more like 80%, what would happen if we increased it by just 10%? What if we could go from 80% to 90% efficiency?

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How Discounting Affects Profitability

How Discounting Affects Profitability

When we’re thinking about cash, we have to think about the discounts that we might be offering, and how discounting affects profitability. Clearly, we want to try to take discounts if we get them. But what about discounts that we’re offering, sales or incentive discounts for people to either buy more, do different things with our products, or buy them at certain times? What about sales discounts? What is that doing to the cash and profitability of our business?

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5 Sales Planning Steps to Profitability

Create a Growth Plan

True sales planning is one of the most important things that a business can do each year. It forces business leaders to think through – in significant detail – what is necessary to accomplish their business goals.

Sales planning  is more than a tactical plan set from on high: “Your quota is $1MM, now go sell!”

Instead, it’s about planning to sell profitably.

Selling profitably is something that is not as straightforward as it seems. We see examples all the time, in companies big and small, that believe they are selling profitably and selling well–but simply are not.

There are examples of strategic decisions to sell certain products or services at lower margins or even at a loss. These may include gaining traction in a new market, gaining a marquee client in a new industry, or an initial sale with high likelihood of highly profitable add-on services.

But these examples should be few and far between and only done based on a specific plan, not because you didn’t realize it was an unprofitable sale.

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Importance of Sales Forecasting

Financial Risk Assessment

The single most important element in the forecasting process is the Sales Forecast.  Generally, Sales drives everything else; it is what determines the expense spending plan.  If the company is a manufacturing company, the sales forecast will drive the production plan.

There are several different ways to approach Sales Forecasting.  Typically it starts with the Sales Department figuring out how much product they can sell in the following year.  Sales people are naturally optimistic by nature, usually overestimating achievable sales.  There are several factors that can impact the forecast:

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Sales and Accounting – They make a great team.

Sales and Marketing is a far more regular team than sales and accounting.  CEO Matt Garrett outlines the many ways that sales and accounting are actually on the same team.

  • Sell more to your existing customers
  • Keep your sales team accountable
  • Teach you how to set up compensation structures to get the most out of your sales team
  • Drive forecasting
  • Understand your ideal demographic and assess whether you are currently selling in the right market. 

 

 

This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.

This post contains trusted sources. All references are hyperlinked at the end of the article to take readers directly to the source.

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