When a business wants to make more money it often uses the approach of increasing sales. After all, it seems logical that more sales mean we are making more money. But that doesn’t always mean that making more money means you are making more profit and profit is the bottom line.
In quick terms when looking at how profit happens we start with total sales or revenue, from that we subtract out the cost of making, producing or providing whatever it is the business does, this is called Cost of Goods Sold or COGS. That number is called the margin or gross profit. That isn’t your real profit, though. From that number, you subtract your non-COGS payroll and your other business expenses like rent, utilities, office supplies, computers, etc., that gives you your net profit. This is what most people see as the true profit of your business. It isn’t but that is another topic for another time.
As you look at the progression of your sales or revenue to net profit, the biggest impact is obviously the deductions. Those things that you must pay for in order to do what your business does with the goal of making a profit. Being efficient with those things is what makes you profitable. Being inefficient is obviously harmful. You may do well with Margin of Gross Profit, yet your net profit could be non-existent, or worse. You could have a terrible Margin or Gross Profit, meaning everything after simply makes your problem worse. These are not issues you can sell your way out of, you have to first look to being efficient.
A very simple tool you can use for your entire business, one that will help you become more efficient, is the method called 5 S. What is 5 s? It involves the use of the following activities:
Sort – a process of removing unnecessary items from the work area, preventing other unnecessary items from being brought into the work area and removing waste. If you aren’t sure if you need it, or you haven’t used it in a long time…remove it.
Set in Order – A process that arranges all necessary items so that they can easily be selected for use. Arranging the work area so that all necessary materials and tools are closely situation. It also causes items to be returned to their proper place when not in use. Finally making the workflow smooth, easy and safe.
Shine – Simply making the workplace clean. Conducting preventative maintenance and keeping all equipment and tools in proper working order. Keeping things clean allows the workforce to observe equipment and tools, ensuring that defects are found more quickly.
Standardize – When you document your processes and then standardize them you can repeat them. When you can repeat them you can measure them, ensure they are efficient, and make them profitable. Further, standardization tells your workforce what the normal way is and what to do when things are not normal. It also makes your training easier as you hire or replace employees.
Sustain – This is where the results of the previous 4 S’s becomes a part of your business culture. The process you have just created is beneficial to all, becomes an intuitive way of doing business and is done without people being told what to do. It involves regular audit or review and makes everything you do part of a new goal-oriented way of doing business. The primary way that a business completes this part of the 5 S process is through training.
The 5 S process is a method that demonstrates how to organize a workspace for efficiency and effectiveness by identifying and storing the items used, maintaining the area and items, and sustaining the practice. The decision-making process usually comes from a dialogue about standardization, which builds understanding among employees of how they should do the work. Through this method, a level of efficiency is gained that reduces expenses. If these reductions are not transferred to pay for other things, then the end result is an increase in profitability, ultimately the Net Profit.
5S is not just a clean-up campaign, it’s a system that allows individuals to work more efficiently. It requires;
- Perseverance and determination
- The ability to see what’s important
- Attention to detail
5 S starts with you the business owner and is ultimately managed and implemented by your workforce, and if you have them, your management. People become empowered, engaged and spirited. As the workplace begins to flow by linking your people and processes, product begins to flow at the needs and tempo of the Customer. Through this, your business can become more profitable without selling more. As a result, as you increase sales over time, your efficient processes ensure your profitability instead of magnifying your loss through inefficiency.