Growth is great. But did you know targeted subtraction can be just as great or greater? If you give it a chance, you could even find it to be one of your best moves in business…
Let’s take a pretty common situation in business as an example.
Say a business has primarily two different service types, and one service produces the most volume. Also, let’s say that high volume service is what the business is best known for (read more here) and its most efficient profit producer (read more here). Meanwhile, the business offers one other service that produces slight losses each year.
In the following, we’ll see how that business could significantly improve its profits – potentially by tens or hundreds of thousands of dollars per year!
Since the status quo is the “strategy” business choose by the default when making no adjustments, let’s first illustrate the business’ situation. Note the differences profit and return on asset differences between the two services.
In this hypothetical case, performance is not too bad overall but could it be better? Keep reading below…
Discontinue Losing Service
The answer to the question above is “yes, it could be better.” As a first step toward improvement, consider below how the business’ financials would change if it solely eliminated the unprofitable service without also eliminating its portion of the business’ overhead costs or selling and re-purposing that service’s assets.
Notice how this partial step toward improvement does more harm than good to the business’ financials. This is true because it’s not enough for a business to simply stop selling an unprofitable service. There’s at least two more related steps to be taken, as illustrated in the next two sections…
Discontinue Losing Service + Eliminate Overhead
Now, let’s look at how the business’ financials could improve if the unprofitable service were discontinued and its portion of the business’ overhead eliminated. As seen below, doing these two things at the same time is when subtraction can (and often does) lead to profit addition.
This is better, right? Yes, there’s a lot to like about an adjustment that leads to $10,000 more profit by doing 25% less overall work! Yet, there’s an additional step that can lead to even more significant profit additions for this business. Read on in the final section below.
Discontinue Losing Service + Reinvest overhead & Assets More Profitably
In this final set of illustrations below, note how these three actions are taken at the same time: (1) discontinue unprofitable service, (2) eliminate that service’s portion of overhead, and use that money instead to support increased volume of the profitable service, and (3) sell that service’s assets (e.g. trucks, equipment, etc.) and reinvest the proceeds in assets needed to further grow the profitable service volume.
It is with this combination of changes that a business has the potential to make major additions to its profitability through subtraction!
In this hypothetical case, profits were boosted by $85,000 or 40%. That’s not an insignificant advantage… and in many industries it can mark a key difference between the best run businesses with owners who live peaceful lives, and struggling businesses run by owners who are under constant stress and pressure.
It Can Work for Your Business
Unless your business only has one service or product type, this is a critical exercise for your strategic planning. Businesses can be transformed or saved when profit addition by subtraction opportunities exist. Likewise, business owners can be saved lots of headaches when they optimize their business profits by taking such steps!
If you’d like to put your business through a test like this to see how you can improve your business profits, please contact us here and we’d be glad to help you make your business more profitable and your life more enjoyable!
Long live small business! Long live small business owners!
Jim Smith, CFP, Founder, PERFORMIDABLE, LLC