Whether a company is already profitable but wants to do better or is losing money and wants to get out of the red, the objective is to increase profits significantly. It’s just a different term people use. Therefore, I use the terms profit optimization and turnaround interchangeably. The process and systems I am about to share will help you increase your company’s profits MASSIVELY.
HOW and WHY You Should Optimize Your Company’s Profits
I hope you all are doing well in your business, enjoying the fruits of your labor, and having a good time with your family and friends. That’s what we all envisioned when we established our companies. But would you like your company to make more money with the resources you already have? Do you think that your company produces optimal profits? Do you believe that you can increase your company’s profits without increasing your revenue?
When CEOs and business owners want to increase profits, usually, the first thing that comes to mind is to increase revenue. They spend a lot of effort to penetrate new markets or dive more in-depth into the ones where they already have a presence, spending vast sums of money on advertising and promotional campaigns. However, increasing revenue does not always equal more profits.
The term profit optimization may not be extremely popular yet, but this is the ONE thing you need to do to get more money in your pocket with the least investment.
So What Is Profit Optimization?
Profit optimization is finding ways to increase your profit with the available resources under the given constraints and making the best use of them.
To make it easier to understand. Let’s say a machine in a factory is producing 5,000 units per month. Assuming we have a demand for the product and the machine is running at full capacity, how are we going to optimize the machine so that it can run at 6,000 units per month? The plant manager might better lubricate the machine, schedule more regular maintenance, change parts more regularly, reduce downtime, etc.
Based on the information above, I hope you have a better understanding of WHAT profit optimization is.
The second question people ask is:
WHY you should optimize your company profits?
I would say nobody rejects more money and more profits. But WHY do you need to optimize your company profits? Imagine all the benefits with more profits that the company can generate.
Let’s dive in.
Reason #1: Put More Money in Shareholders’ Pockets
The more profits the company makes, the more options there are on how the profits shall be distributed, one of which is to distribute it in the form of dividends, which shareholders can use for leisure, investment, etc.
Reason #2: Higher Bonus and Pay for CEO And Employees
As the company makes more money, it can afford to pay better salaries and higher bonuses to its CEO and employees. It can attract more high-caliber employees.
Reason #3: Increase Company Value
As the company profits more, its valuation will also be higher. Even though the price earning multiple is the same, the earning part is higher, resulting in a higher valuation of the company.
Reason #4: Grow the Business
With more profits and money in the company, CEOs and business owners can grow the business, increase sales, and utilize the excess to finance working capital or invest in expanding capacity. It can help the company grow bigger and bigger.
Reason #5: Reduce the Company Debt Faster
More profits and more cash flow will allow the company to pay down debt faster, which will further reduce interest expenses and make the company healthier. This is especially useful when the company has a significant amount of debt.
Reason #6: Higher Return on Investment (ROI)
By definition, when you generate more profits with the same investment, the return on investment is higher.
CEOs and business owners certainly would like to increase their company profits. However, there are three actions they usually take with which they unknowingly sabotage their companies.
Myth #1: To Increase Profits, They Need More Capital
Many of them think that money is the solution.
In one of the companies I worked for, they were taking out new loans and asking for more capital from shareholders every year, but never able to become profitable. They were essentially borrowing money to finance their loss. After three years, they had borrowed hundreds of millions of dollars, and the banks didn’t want to lend money anymore.
Borrowing money to finance company losses is deadly, making the company’s condition worse as there is more interest to service.
Just adding more money is not the solution.
Many CEOs and business owners make the same mistake, thinking that having more money is the way to generate more profits; therefore, they borrow more from banks and ask for more capital from shareholders.
As a result, CEOs and business owners cannot sleep well; they end up stressed, and their companies’ futures are dependent on continuously acquiring more loans.
Myth #2: More Revenue is Equal to More Profits
Undoubtedly, the company needs more revenue to grow, but more revenue does not always lead to more profits. An increase in company profits can only happen if the cost does not increase in tandem with the increased revenue.
The challenge is, can a company maintain a fixed cost within an acceptable range and the variable cost per unit more or less remains the same?
Most companies cannot keep their fixed and variable costs the same within a range. Many think it’s a no-brainer and simply believe that more revenue will equal more profits. “If I have more revenue, everything will be fine.”
That is until they have the shocking revelation that the revenue keeps increasing, and so does the losses.
Why? Leaky bucket!
The extra revenue doesn’t matter; if the holes are getting bigger too, the bucket will never be full. It could end up empty.
Myth #3: Don’t Fix It If It Is Not Broken
Many CEOs and business owners think that they can use the same systems today that was used when the company first started. They can keep replicating the same organizational structure as if it were still a small company, and it will get taken care of systematically. Hoping that the problem will fix itself if they wait…
These are “symptoms” of the real problem. The debt is not the problem...
You Need the Right “System”
* Not another loan from the bank
* Not another plan to increase sales & hopefully revenue, and
* Not some highly paid consultant who promises to make your company to the next level but doesn’t deliver results
How I Discovered the “System”
I have helped many hundreds of million-dollar companies across multiple industries grow its revenue, increase profit, and lead successful company turnarounds.
Results previously seen include increasing company profits by 3,000% over a few years and increasing profit by $30 million in a single year.
One company laid off 25% of its employees before I joined, in an attempt to improve the bottom line. They hoped they could pay off the debt by reducing labor costs. How much additional profit was generated by boosting its revenue of $63 million per year? Close to nothing.
They needed more loans, acquired more debt. One-time cost-savings solutions do not work.
You need a system that continuously and exponentially reduces costs.
This was when I developed the HRS system.
The HRS system will help you get results faster, without spending years taking out more loans as the company generates little to no profits or even posts losses.
The answer to these questions is implementing the right System!
My HRS System
1. Take a Helicopter overview(H)
2. Determine the Root Cause Problems (R)
3. Implement Solutions (S)
How Do HRS Systems Work?
Step 1: Take a Helicopter Overview(H)
What do you usually see when you ride a helicopter and take a view from above? You will see the entire landscape -- the sea, mountain, beach, islands, land, etc. You don’t see all the details, such as the beauty of a house, the interior of a building, the beauty of a waterfall, but you can see clearly whether there are deserts, mountains, sea, islands. You see the big picture and get a better understanding of what is missing and what is available.
It’s the same with our process here. We start with a helicopter overview to see the overall picture of the company so we can view the company holistically, the interaction between the units, what works well, and what needs to be improved. This helicopter overview will help you find and determine the root cause problems and help drive you toward a solution to the issues holding your company back so that you can reach peak financial performance.
You need to look at the company several layers deep to utterly understand how to create massive savings and profits (not creating surface-level solutions).
As each company’s situation is different, we need to understand the business holistically and get the big picture. After we understand the company’s operation, we determine the root cause problem. This phase is important for determining the RIGHT root cause problems to enable us to provide the RIGHT solution to Optimize your company’s profits.
There are seven universal themes in the helicopter overview. You can add more if you think it will be helpful. Each company has its own particular needs, but these seven universal themes should give you a guide to find where your root cause problem(s) to improve your company’s financial performance.
1. Financial statement
2. Organizational structure
5. Money flow
6. Company culture
7. Sales and marketing
I will discuss each of the universal themes in the following parts.
Even when you are a CEO or a business owner, you need to take a helicopter overview with fresh eyes to help you find the root cause problems.
Why? This ensures long-lasting profits in your company, not merely a one-time success. That way, you can utterly understand how organizations affect each other, productivity, and profitability.
What Most People Do Wrong
* Search for surface level cost savings.
* Look at the biggest dollar value on the income statement and focus on improving that item.
* Only look for individual item savings.
* Look for “quick wins” that will yield immediate cost savings (but in reality, have a minimal impact).
Step 2: Determine the Root Cause Problems (R)
Understand where the internal money leaks, cost inefficiencies, and other root cause problems are and handle them differently (and put more capital back in your pockets) with your big picture findings.
We need to find what the root cause problems are so that we can derive the right solution for the company to reach peak performance. Why? Finding the underlying issues will create solutions that yield massive savings year after year.
Only focusing on one-time savings reduces the effectiveness of your operations overall.
What most companies do wrong:
* Lay off employees,
* Look into only reducing individual items, and
* Hope to use an economy of scale to reduce unit cost.
Just like any successful doctor/patient relationship, turning things around in your company starts with a proper diagnosis. Without this, you may apply the wrong treatment. If you misdiagnose and apply the wrong treatment to your company, the problem will continue, and the company might die.
Step 3: Implement Solutions (S)
Why is this step important?
Implement proven approaches to create a system that is so efficient that we can minimize opportunities for temptation.
* Systems that embed internal controls in day-to-day operations.
* Systems that work coherently and efficiently to achieve the company’s goal of achieving more profits.
* Systems that provide integrated solutions to the root cause problems.
Solutions normally implemented only save the company money for a year and do not ensure long-lasting success.
What most companies do:
* Take out additional loans from banks and ask shareholders for additional funding.
* Spend millions on consultants to yield minimal cost savings that strain the company.
* Rely on periodic checking that often fails long term instead of implementing proven systems
The three steps to increase company profits:
#1 – H
#2 – R
#3 – S
Involve an Outside Consultant or Facilitator
Diagnosing and determining root cause problems requires time and expertise. In many cases, CEOs don’t have the time to look at the company as a whole and go multiple layers deep into the organization. Usually, the root cause problems are too substantial to deal with internally; even C-suite executive isn’t skilled enough to address them adequately. It would help if you had an effective outside consultant to guide you through the process.
Sometimes it’s good to have a consultant or facilitator with a background in finance and business management; they don’t have to be in your industry, but they should understand the business well. However, be aware they don’t just focus on the surface level problems. It can be particularly helpful to have people who have gone through the process and done it, having “seen a thing or two.”
I provide resources for a checklist to help you with starting your helicopter overview and to diagnose the root cause problems at www.rantaiconsulting.com
Use Your Resources
To help you on this journey, and it is a journey, there are resources available to you on my website. Take advantage of them, particularly the helicopter overview checklist. I recommend that you complete each part as you go through the process. It’s a good idea to have it with you whenever you read the book—and, ideally, all the time (either in digital form or on paper -whatever works best for you).
Great, hard-to-achieve results seldom happen without proper planning and preparation, so skip this step at your peril!
If you complete your action plan as you read, then once you’ve finished the book, you will have a solid, ready-to-use “playbook” that you can immediately execute to start curing your company’s problems and implementing solutions to increase your company profits.
Have Patience, Give It Time, Invest a Little
I know you want to fix everything quickly. If you work through the HRS system, as discussed here, you will soon start to see progress. Some things will, indeed, be fast and easy to handle. However, don’t think that this process is a quick fix or a magic bullet. It’s not, and it may take some money to help you get through everything. But it doesn’t have to be a lot.
Most of the solutions I present in this book are reasonably economical. Some may cost a bit more, but the investment will be worth it. Just understand that curing the root cause of the problems is not something you can solve simply by throwing money at it.
Time to Start
Now that I’ve set the stage for you, it’s time to get started with diagnosing and curing your company’s root cause problems.
Don’t worry. Getting started is easy. It’s the easiest thing you’ll do on the journey, and probably the easiest thing you will do today.
All you have to do is turn the page. Let’s jump right in.