Six Ways to Determine the Right Revenue Pipeline in a Manufacturing Company
Many business owners think that revenue volume is the key to success. However, the volume must come from the right products or services, or the results may be disastrous. To illustrate this situation, we will discuss the actual story of a small automotive repair and towing business.
The business had a regional towing contract with AAA Auto Club which gave the business top priority on all service calls; however, for four or five months during the year, the business was operating six to seven days a week but not making any money. After a third-party review of costs, it was determined that the AAA business was costing on a cash basis several dollars per call more than the revenue being generated. The owner was reluctant to give up what represented 40% of his business, but he took professional advice and eliminated that contract. The result was a normal work week throughout the year, much higher profitability, and time to focus on more profitable work.
Here are several steps your company can take to make sure that your revenue stream is the best one for your business:
1. Evaluate Your Production Equipment and Processes
You must determine the capabilities of your equipment and processes, as well as the size limitations of each piece of equipment.
2. Evaluate Your Human Resources
People make a company. Document the knowledge, skills and talents of all the personnel involved in your production, engineering, quoting, and quality aspects of your business.
3. Know Your Costs
Unfortunately, many companies do not really know the true costs of each of their products because they use a costing system that is too simplified to generate accurate information. Average costs are used, rather than actual product costs. Determining costs appropriately is a very specialized process, and should be done under the direction of the CFO.
After following these steps, select the products that best fit your company and that make the highest contribution to profitability. You may also include volume products with lower margins if you can determine how to improve the margins.
The best place to start to determine how to sell more products and to add new products to your mix is to ask your existing customers what they see as your strengths and your weaknesses, and what it would take to get more of their business. Next, look for new products that best match your business foot print.
Many companies are often tempted to take on work at less than full price because they have excess capacity, and they believe that the additional business will contribute to their bottom line. This is an area to exercise caution; make sure that the margins on this new business are sufficient to add to the bottom line, and not take away.
Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Indiana, Kentucky, Michigan, North Carolina Pennsylvania, South Carolina, West Virginia and Tennessee. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses.
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