by Simon Kearsley* - Friday, 21st November 2008 -

During a downturn it’s natural to think about ways in which you can reduce your monthly bills, but the act of scrutinising costs isn’t just about shedding pounds, it can also help you understand how to maximise profits.

One sure result of any recession is that as demand falls, you’re likely to be chasing smaller amounts of business, so it’s imperative that the work you do take on is as profitable as it could be.  A common trap that many fall into is to ‘undercharge’ for a job because they base a quote on false or inaccurate assumptions about costs of production.

In particular, projects that are labour-intensive are prone to this problem,  because the amount of time or resources employed on projects is not properly measured, jobs overrun and ancillary costs like expenses are not taken into account.  

There are early warning signs you should look out for that might reveal that profits are falling short of their real potential:

•    Quotations are a matter of guesswork
•    Spiralling expenses as jobs overrun on estimates
•    Over-servicing & underpayment (i.e. spending too much time on a job and not being able to re-charge it to the customer)
•    Billing of projects is delayed affecting cash-flow
•    Expenses or timesheets are collected after invoices have gone out
•    Projects run on but the original quote stands
•    Turnover does not correlate with profitability

Sound familiar?  How many times do you hear directors say ‘we must focus on new business opportunities’ when perhaps resources could be better spent on increasing margin and revenue from existing customers.  

To get there, you need to study what projects have been fruitful in the past and how you can replicate these in the future. The irony for many firms is that they think they can’t afford the time or resources to properly audit their costs, but the reality is that they can’t afford not to. Much of the legwork can be automated using project accounting packages which enable you to track costs more easily and calculate the information you need to become more savvy when it comes to future revenue opportunities.

Managers may face an uncertain time over the next few months, but instead of panicking about dwindling order-books, why not look at increasing margin from existing business. You may just find you are already sitting on significant untapped profit reserves.

*Simon Kearsley is CEO at bluQube accounting software

A free ‘Director’s guide to understanding costs and boosting profits’ is available to download here

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