| This Article Is Based On Proven Real-Life Practice | | | | methods of business marketing and advertising can |
| The ideas, concepts and strategies I advocate for | | | | be quite expensive especially when used for |
| adoption in this article are based on proven practice. | | | | protracted periods. The dilemma of the business |
| In fact, the case study and specific analogies used | | | | owner who seeks increased exposure therefore |
| are based on real-life activities that I personally | | | | tends to be, finding a reliable way to stay in touch |
| partook in over a period of six years, as a manager | | | | with(or visible to) her target audience without going |
| in a large blue-chip multinational brewing company. | | | | bankrupt. |
| Read my article titled "Use Custom Automation Of | | | | The answer, from my experience lies in learning how |
| Your Spreadsheet Reports To Drive Down Costs | | | | to intelligently leverage technology and the Internet |
| And Increase Your Profits" for additional details of | | | | to complement the marketing efforts being made |
| my experiences in this area, while in paid | | | | offline, in a way that cumulatively lowers overall |
| employment. | | | | expenses incurred - resulting in increased profits over |
| What you learn from reading the above mentioned | | | | time. Read my article titled "Zero Cost Methods To |
| article, will hopefully encourage you to seriously | | | | Boost Your Business Marketing and Cuts Your Costs |
| explore ways to put the information provided in this | | | | Using Your Website" for tested and proven ideas, |
| article to good use for your business. The principles | | | | methods, tools and resources you can use. |
| described below can be successfully adapted to | | | | 2. Innovate More (By Reducing Your VC) : Actively |
| virtually any business operation - be it service or | | | | work to discover and implement quicker, cheaper and |
| production based. | | | | easier ways to deliver the same products/services to |
| If you need any help with thinking up ways/means | | | | those who want them. Assume you previously could |
| of putting them to use, I would be pleased to help | | | | only turn out 1000 units of your product per month |
| out. | | | | at a cost of $5.00 per unit(to sell at $5.75 per unit). |
| Case Study | | | | Then following a change in your procedures, |
| "Because its purpose is to create a customer, the | | | | suggested by one of your employees - who gets |
| business enterprise has two - and only these two - | | | | rewarded accordingly :-) - you are subsequently able |
| basic functions: marketing and innovation. Marketing | | | | to routinely churn out 1500 units per month at the |
| and Innovation produce results. All the others are | | | | same $5.00 cost per unit, the implications for your |
| costs" - Peter Drucker | | | | year end profitability are obvious. Entrenching a |
| What follows is a bit of a simplistic example, but it | | | | continuous improvement culture in your operations will |
| serves the intended purpose of providing a basis for | | | | facilitate innovation - to your ultimate benefit. |
| the following discussion. The logic on which this | | | | Use Your Spreadsheet And Accountant |
| analogy is based can be applied to any situation. | | | | To reduce your VCs, you need to measure, record, |
| African Arts Concepts Limited (a hypothetical | | | | analyse and trend your data. Many of the income and |
| company) uses three raw materials, A, B and C in | | | | expense items you need to capture in your |
| producing their flagship brand Product Z - which sells | | | | monitoring are likely to be the same ones your |
| for N14,000 naira (about $100 equivalent, using a | | | | accountant/auditor would focus on in helping you |
| N140.00 Naira to $1.00 US dollar currency conversion | | | | prepare your end of year accounts for tax returns |
| rate) per unit - in the following combination: | | | | computation. |
| 5 lengths of material A(N2,500.00) + 1 kg of material | | | | Therefore, at this stage you might find it useful to |
| B(N1,500.00) + 20 pieces of material C(N,2500.00) = 1 | | | | involve your accountant in generating the |
| unit of Product Z(N6,500.00 Naira or $46.43 US | | | | spreadsheet you want to use - or even have him |
| Dollars). | | | | give you one s/he uses, so you can adapt it for your |
| Assume other (say operational and marketing) | | | | purposes. |
| expenses amount to N500 per unit of Product Z , | | | | Justification For Using VC Reduction(Instead Of Price |
| the Cost Price for one unit would be | | | | Increases) To Increase Profits |
| N7,000.00($50.00) - approximately. That means | | | | No matter how large your turnover or revenue is, |
| whenever 1 unit of Product Z is sold, a gross profit | | | | control of your expenses is the only sure way to |
| of N7,000 (N14,000 - N7,000) or $50.00 USD is made | | | | reasonably ensure your profits are maintained in the |
| by African Arts Concepts Ltd. | | | | face of fierce/increasing competition, and/or market |
| THE PROBLEM (Common To Many Businesses) | | | | fluctuations. This is especially so, because you cannot |
| Now imagine that a staff of African Arts Concepts | | | | raise your selling prices at will - else you price yourself |
| Limited begins to over use (and this does happen!) | | | | out of the reach of your target customers. |
| material B by say 0.5kg for every unit of Product Z. | | | | Three(3) Practical Benefits Of Applying VC Monitoring |
| The usage cost for(i.e. cost of using) Material B per | | | | Control And Reduction Initiatives In Your Business |
| unit of Product Z produced will become | | | | 1. Long Term Affordability Of Your Products/Services |
| N2,250(N1,500.00 plus N750.00) . | | | | - You will be able to price more competitively and still |
| 5 lengths of material A(N2,500.00) + 1 kg of material | | | | retain good profit margins even when market |
| B(N1,500.00) + 0.5 kg of material B(unrecorded | | | | situations do not favour most other operators. You |
| N750.00 usage cost ) + 20 pieces of material | | | | would have greater customer appeal. More |
| C(N2,500.00) = 1 unit of Product Z(N7,250.00 Naira or | | | | customers are likely to be able to afford you i.e. your |
| $51.79 US Dollars). | | | | VC reduction efforts enable you price your products |
| Adding the other (operational and marketing) | | | | service in such a way that they never become too |
| expenses of N500 per unit of Product Z, would bring | | | | expensive for your clients/customers. |
| the cost price/unit of Product Z to N7,750($55.4 | | | | Also, your ability to cut down your expenses without |
| USD), instead of N7,000($50.00 US Dollars). In | | | | negatively affecting your product/service quality or |
| otherwords, the company incurs an - unnecessary - | | | | delivery, will make it possible for you to offer lower |
| N750 or $5.4 US Dollars additional cost to produce | | | | prices/rates and depend on sales volume to sustain |
| EACH unit of Product Z. | | | | the same profit margins. The resultant increased |
| That extra $5.4 would most likely be LOST because: | | | | customer base, will naturally afford you increased |
| (a). African Arts Concepts Limited may not detect it | | | | marketing opportunities, Enhanced ability to withstand |
| - except they have monitoring systems(e.g. a custom | | | | survive market place or industry fluctuations and so |
| automated Variable Cost Analysis Spreadsheet) set | | | | on. |
| up to alert them to such occurrences. | | | | This is easy to appreciate. A good example of a |
| That batch of Product Z will therefore still be sold for | | | | business that obviously has a competitive edge of |
| $100.00 US Dollars per unit(a 20% LOSS). | | | | this type in the market place is Richard Branson's |
| (b). Even if it is detected, little can be done to | | | | Virgin Airlines. They offer some of the lowest rates |
| correct it for batches that would already have been | | | | available in the airline industry, often delivering about |
| produced BEFORE discovery/correction of the | | | | the same quality of service as their competitors - |
| problem. | | | | who may not all necessarily be too pleased about it |
| Multiple Negative Consequences | | | | :-). If Virgin did not have the means of sustaining this |
| If continued unchecked, this over usage can quickly | | | | practice, while remaining profitable, they would have |
| cause huge losses: Multiply the N750 naira ($5.4 USD) | | | | crashed out of business long ago. |
| over usage by say 1000 units of Z produced in a | | | | I never get the accountants in before I start up a |
| month and you get N750,000($5,400 USD) - lost | | | | business. It's done on gut feeling, especially if I can |
| unknowingly.(That $5,400 USD over usage equates | | | | see that they are taking the mickey out of the |
| to losing 54 market ready units of Product Z!). | | | | consumer. - Richard Branson |
| What will typically happen is that at the end of the | | | | 2. Increased Assurance Of Sustainable/Increasing |
| month, the company would find that they have | | | | profits - Which would you prefer: More Revenue? Or |
| 500kg LESS of material B left than expected. This | | | | more Profits? At the risk of stating the obvious, if |
| would subsequently require them to make an | | | | you do not control your expenses, your revenue can |
| additional unplanned purchase of material B using | | | | increase without a corresponding increase in your |
| money budgeted for other purposes - thereby | | | | PROFITS. One does not have to be in a business |
| disrupting cash flow etc. | | | | where billions need to be spent before knowing that |
| The foregoing is one major reason why some | | | | this is true. |
| businesses that appear to be doing well suddenly go | | | | When two units - instead of one - of a raw material |
| under, or record low profits/losses! They fail to keep | | | | are used to produce 1 unit of your bottled juice, you |
| a grip on their real costs of operation. What has been | | | | are spending more to produce that bottle, hence |
| described here is applicable to virtually any type of | | | | your profit margin for that bottle will drop by the |
| business - be it service or product based. One only | | | | value of that extra unit of raw material used, be it |
| needs to change the items of income and | | | | with or without your knowledge. |
| expenditure considered in delivering the relevant | | | | Whether you know about it or not; whether you |
| product/service. | | | | measure it or not is immaterial, and will not change |
| Question: How Do I Prevent A Problem Like The One | | | | the fact that you will earn a lower margin on that |
| Above Happening To Me? | | | | product. If that then happens to many products(or a |
| Answer: By Adopting Variable Costs(VC) Monitoring | | | | larger number of the same product), you may find at |
| Control Techniques. | | | | the month or year end, you get a shocking low profit |
| I like to think of Variable Costs, from a lay man's | | | | declaration when you(or your accountant/auditor) |
| perspective, as those expenses you incur, which | | | | reconcile expenses, revenues etc for the period. |
| can(and do) vary depending on your ability to find | | | | Things could even fall apart before then. That's when |
| cheaper yet equally - if not more - effective ways to | | | | you see a company that gets plenty of business |
| do what you do, when compared to your current | | | | from old and new clients struggling to find money to |
| methods. | | | | run daily operations and make salaries payment(cash |
| To implement a VC Monitoring/Control system, you | | | | flow)! |
| can follow the steps outlined below - making needed | | | | This is why setting up a Variable Costs Monitoring |
| adjustments to suit the peculiarities of your unique | | | | Control and Reduction System is important. It will help |
| situation or need (Note that the use of spreadsheets | | | | you keep a close watch on all the important |
| is integral to the approach I recommend, as it | | | | measures of your business' operational performance, |
| facilitates sustainability of systems set up). | | | | so that you can easily, discover undesirable trends |
| Step 1 : Collate Relevant Data in Spreadsheets : Start | | | | and nip them in the bud. At the same time, you |
| recording and analysing your business revenue and | | | | would be able to intelligently experiment with changes |
| daily operating expenses, including variable cost | | | | aimed at reducing your operations costs, and monitor |
| elements such as how much you spend on | | | | their impact in order to decide whether or not make |
| marketing, transportation, phone calls, materials usage | | | | them permanent. |
| etc. You can easily do this by creating Excel | | | | 3. Greater Operational Efficiency In Using Labour |
| spreadsheets with raw data entry interfaces linked | | | | Resources/Time : Uncover the invisible costs by using |
| to standard reporting templates(which generate | | | | spreadsheet tracking. Some costs are more visible |
| meaningful output from formulas applied to your raw | | | | than others. It is those "invisible" cost channels that I |
| data). | | | | refer to here. They are the "potential" profit drain |
| For best results, you might find recording materials | | | | pipes. Do you know how to identify, monitor and |
| usages in the same spreadsheet, with their | | | | control them in your business? Are you sure you're |
| corresponding prices helps in deriving expenses | | | | not missing a few critical ones? Often times they are |
| relevant to materials usages(by simple linking of cells | | | | avoidable - should not be there - but because the |
| to be multiplied e.g. "Kgs" used by price per kg). | | | | business owner has no monitoring/control system in |
| Step 2 : Benchmark Your Process : You will also need | | | | place, they build up over time, till they cause BIG |
| to do some benchmarking by obtaining detailed | | | | problems. |
| industry data for businesses similar to yours. Using | | | | Examples include theft/pilfering by outsiders or staff, |
| that data, you would derive weighted averages, | | | | materials over usages, idle/downtimes in different |
| upper and lower control limits etc. These could then | | | | aspects of your operations, overstaffing, etc. All |
| be charted in your spreadsheet using actual data you | | | | these things can - and do - happen. The challenge is |
| would periodically post. Your objective in managing | | | | for the business owner or decision maker to setup |
| your business/process would then be to ensure your | | | | monitoring systems to quickly throw up |
| Key Performance Indicators(KPIs) fall between the | | | | inconsistencies in the inflow/outflow etc of the |
| established control limits implying that it is performing | | | | concerned items. |
| optimally. | | | | Want To REMAIN In Business For The Long Term? |
| If during your daily, weekly or monthly recording and | | | | As more and more people go into business for |
| monitoring, you then notice any of your charted KPIs | | | | themselves, every owner will have to contend with |
| deviating outside the favourable range, you would be | | | | increased availability of the same products/services in |
| able to quickly investigate and correct the problem | | | | the same market. As has happened in the past, |
| before it goes too far. In the case study used above | | | | some will have done their operations management so |
| for example, if a target usage rate of material B per | | | | efficiently that they will be able to drop their prices |
| unit of Product Z produced had been routinely | | | | significantly below the market price(or refuse to |
| recorded in a spreadsheet, and plotted on say a | | | | increase them), and still make as much profit as (or |
| Schewart chart, the CONTINUOUS over usage of | | | | even more than!) their rivals. The latter on the other |
| 0.5kg per unit would have reflected in the slope of | | | | hand would struggle to match such price drops if |
| the chart - and therefore led to early detection. | | | | their operating costs are higher - possibly resulting in |
| Again, this is a simplistic approach. More effective | | | | their being forced out of the market. |
| methods(e.g. automated plotting of a Cusum - | | | | This applies to one-man businesses as well as |
| Cumulative Sum Deviation chart) can be easily | | | | corporate multinationals, be they product |
| employed using spreadsheets with about the same | | | | manufacturers, distributors, resellers or service |
| effort. I cover Cusum charts, and how to use them, | | | | providers. The only people who don't worry about |
| in considerable detail in my forthcoming article titled | | | | cutting costs in order to give customers/clients stable |
| "Simple Performance Measurement/Process Control | | | | or even lower prices, are monopolies(due to lack of |
| Tools You Can Use In Your Business". | | | | competitors) and those who "buy their way" to new |
| Question: Okay, That's To Detect/Stop Things | | | | business. |
| Getting Out Of Hand. But HOW Exactly Do I Go | | | | For those who play by the rules, your ultimate |
| About INCREASING My Profits Without Raising My | | | | objective, if your business is to GROW, will have to |
| Prices? | | | | be to put money in your pocket, that you can spend |
| Answer: By Applying Practical Variable Costs(VC) | | | | without looking over your shoulder for creditors(or |
| REDUCTION Techniques. | | | | the IRS - for taxes) and without running out of |
| As I earlier stated, your variable costs are those | | | | money to run your business(cash flow). The wise |
| expenses you incur, which can(and do) vary | | | | owner will make a habit of continually exploring |
| depending on your ability to find cheaper yet equally | | | | Variable Cost Monitoring/Control and Reduction |
| if not more effective ways to do what you do, | | | | initiatives, that will enable successful delivery of larger |
| when compared to your current methods. | | | | numbers of products/services at lesser cost, in lesser |
| By implication therefore, a VC REDUCTION Strategy | | | | time, and using lesser resources. |
| is bound to make a difference to your bottom line | | | | I could go on, but I think the point I've made here is |
| profits. | | | | clear enough already. So much thinking/re-organisation |
| Adopting this strategy means you will actively | | | | will have to be done initially to develop the needed |
| encourage/engage in the routine search for quick, | | | | systems. But the process once started, can only get |
| easy, practical, inexpensive, and sustainable ways to | | | | easier. And the positive benefits derivable from |
| drastically cut down on the expenses required to | | | | adopting this approach will be immediately obvious. |
| make and/or deliver your products and services to | | | | If You Remember Nothing Else, Remember The |
| those who want them. | | | | Following: |
| The foregoing underscores Peter Drucker's assertion | | | | 1. One good way to maintain and/or significantly |
| that Marketing and Innovation are the two basic | | | | increase your profits without raising your prices, is to |
| functions in any business which can enhance its | | | | reduce your Variable Costs(VCs). |
| profitability. All others are costs. | | | | 2. You can reduce your variable costs by marketing |
| Therefore To Increase Your Profits Without Raising | | | | more efficiently (getting more customers at lesser |
| Prices : | | | | cost, AND maintaining them at lower expense). I |
| 1. Increase Your Marketing (While Reducing Your VC): | | | | once read an article that proposed a new parameter |
| Find more NEW customers more frequently. But in | | | | COCS: Cost Of Customers Sold or Served). This |
| doing so, think up cheaper and more effective | | | | could be adopted as a Key Performance |
| efficient ways to reach more people who fit your | | | | Indicator(KPI). |
| target audience profile. Even if you already have a | | | | 3. You can also reduce your variable costs by |
| website, chances are there are still a number of | | | | innovating more(i.e. developing greater efficiency in |
| viable ways you could use it to achieve this purpose, | | | | your routine internal operations and/or product |
| that you are YET to explore. Take it from me. I get | | | | service delivery). That way, you would be able to |
| so so much done at little or no extra expense using | | | | produce/deliver more products and/or services with |
| my website resources more creatively. | | | | less effort, in less time, and using less resources. All |
| One reason why this is possible is because I have | | | | of these would imply LOWER expenses/costs, |
| devoted hundreds of hours to learning web design, | | | | leading to INCREASED profit retention per unit of |
| custom CGI programming and web marketing | | | | product/service sold. |
| techniques. | | | | 4. There is saying that : "You cannot manage |
| If you actively work to find new customers, you | | | | something, if you do not measure it. Nor can you |
| create a growing pool of clients from whom you can | | | | measure it, if you do not record it". Spreadsheet |
| generate referrals and repeat businesses resulting in | | | | tracking will help you conveniently implement and |
| higher sales volumes/turnover. Also, it helps you | | | | sustain the process of monitoring, controlling and/or |
| cover gaps that will occur periodically from client | | | | reducing your VCs. You will need to do this so as to |
| attrition or turnover. | | | | constantly evaluate progress of your VC monitoring |
| Use Your Website More Effectively: Traditional | | | | control and reduction initiatives. |