Are Your Employees Helping Drive Profitability?
March 2020
Are Your Employees Helping Drive Profitability?
How are you driving improved profitability? It is common for businesses to be focused on reaching budgeted sales and net income numbers. Performance incentives are often tied to reaching those budgeted numbers and achieving those numbers is usually driven by bringing in additional sales. Do all your employees have an active role in everyday financial decisions that can improve profitability?
Just as they take action by making decisions that impact their household disposable income (such as changing cable/internet providers to save money or budgeting for a trip), are they doing the same within your business? There are thousands of financials transactions that occur within a business, and employees are a part of those transactions from start to finish. Their understanding of those numbers and how their actions impact those numbers can be a driver for success.
Although there are several key areas employees can impact profitability of the business, below are some areas to consider:
· Managing Overtime – Many businesses spend significant dollars in unnecessary and excessive overtime pay because it isn’t properly managed. While overtime shouldn’t be frowned upon if necessary, many overtime hours that are not formally approved, or warranted, are incurred everyday within organizations. These decisions can have a significant impact on the bottom line. Because too many managers don’t want to have the difficult conversations, it often goes unaddressed.
· Efficiency/Utilization – If you are in a service-related business, understanding labor efficiency and utilization is key to improving profitability. Investing in proper time tracking, payroll management, and software solutions can pay off by better understanding your business and improving overall performance.
· Project Profitability & Post-Mortem Analysis – Do you have processes in place to monitor project profitability? It’s important that you and your team monitor, understand, and make appropriate adjustments to positively improve the profitability of a project during the project. You should also be spending time reviewing the project afterward to understand what went right and what went wrong. Taking the time to discuss which processes may need to be changed or new processes implemented, will help ensure success on future projects. Most businesses are so busy that many of these steps get overlooked. Formalize an internal process that consistently provides in-progress and post-project review.
· Profit Margins – Profit margins, if not managed properly, can often decline as prices continually increase. Are you monitoring your profit margins? Do you and your team know the impact a 1% change in profit margins has to the bottom line? Just as you see increases from your vendors, your company should have a formalized process in place to consistently evaluate and implement pricing increases for your products and/or services. It’s also important to have a firm understanding of your profitability by client and service/product offering.
· Purchasing Discount Programs – If they’re not doing so already, your purchasing department should be periodically reviewing pricing with your key vendors. Often there are volume discounts available that your team may not be aware of. It’s also important that your team confirms you’re receiving products and services at the agreed upon prices. Tracking and managing shipping costs is another area where you can look to ensure your money is being spent wisely.
· Understanding & Managing Accounts Payable and Approval Levels – Many small-to-medium sized businesses often don’t have the proper processes and internal controls with documented approval levels for transactions, and many invoices get processed and paid without verification or proper approval. Typically, accounts payable should not be approving invoices. Organizations should have an approval matrix outlining the limits and types of expenses each person or position can approve, and the appropriate sign-off should be made on each invoice. Many businesses just follow a typical enter, pay, and stamp a signature on the check “process,” and invoices get paid without proper verification of accuracy, legitimacy, need, and proper approval. Evaluating and tightening controls in this area can have a measurable impact on profits.
· Documented Processes – Creating documented standard operating procedures (“SOPs”) can be overwhelming, but the investment in developing them is exceeded by the return/impact on the organization. SOPs provide consistency and accountability within the organization and help reduce costly errors. There have been situations where a business’s product and services get left unbilled to customers due to lack of communication and processes, significantly reducing profitability, and can sometimes go unnoticed for months or years.
· Inventory Management – Depending on the size of your inventory within your organization, maintaining proper inventory levels can have a large impact on reducing carrying costs, increasing cash and reducing obsolete inventory write-offs.
The most effective employees are employees who act like owners. Even if they’re not technically “owners,” they need to have a stake in the game. There are many methods for getting employees more invested in the organization. Some examples include sharing of profits, bonuses tied to project performance, or an incentive related to expense savings. And, not all incentives need to be monetary. You can reward a team with lunch for achieving a certain goal, or an extra day of vacation. Any incentives or rewards need to be clear, documented, and easy to understand. Incentive levels should also be considered. If the company achieves budgeted net income and employees know they will receive a bonus, what is the impact if they reach 110% of net income? Would they earn a higher incentive for bringing higher profits to the business, or would the bonus amount be the same?
A properly implemented employee incentive program can bring significant increases in productivity, higher success rates in achieving business goals, higher sales, higher employee retention, and of course increased profitability. What can you do to help build a culture in which your employees drive profitability to the business, benefiting both them and you?
Jackie Bartanen, CPA, CVA, MBA, Consultant with Journey Consulting, LLC