1% Profit Rule - Part 2

Part 1 provided a background of the 1% Profit Rule.  Part 2 provides an example and access to a complimentary 1% Rule spreadsheet.

Often companies attempt to improve profit by focusing only on sales growth. More often than not these sales drives are not managed well, are executed with a disregard to productivity improvements, or spend too much money to capture only a small increase in sales. The example below is one that I have seen in virtually every company I work with: they do a wonderful job increasing their revenue which generates more margin dollars, but in reality their success is an illusion and they are leaving lots of money on the table.

The example company below successfully increased revenue by 10% over the year prior. However, they did so with an increase in cost beyond just the cost of material, which should be the goal when growing revenue. Though their sales increased, their overall gross margin percentage became worse as a percentage of sales. Yes, there may be an overall growth in gross margin dollars but it was done at the expense of profit.

1% Rule ExampleTwo measures in particular illuminate the problem. The productivity measure of minutes per unit is virtually identical in both 2006 and 2005 and percent change in hours and units are nearly identical as well. Operations met the challenge of increased sales by adding labor and performing the work as they always had. In short, they added cost.

If the company had applied the 1% rule across the board and initiated small productivity improvements and other gross margin savings in addition to the push for revenue growth, they would have decreased their gross margin percentage to match the year prior. This would have added $315K to their bottom line – nearly equal to the increase in labor costs.

So when managing your organization, look for the opportunities to make little 1% improvements in sales, purchases, productivity, and expenses. If every department in your organization focuses on small 1% change initiatives, then the change will be more manageable. Because “if you always do what you’ve always done then you’ll always get what you’ve always got” and that will eventually cost you more than just gross margin dollars.

We have prepared an excel template to allow you to load your numbers and play around with the impact of savings options.  Click here for a complimentary spreadsheet.