Survival tactics: Chapter 25
Economics 101:Common horse sense.
The number of years one spends in college and a string of degrees after ones name has nothing in common with what I call " common horse sense". All top notch athletes basically go through the same training routine. Yet you get a few that are heads and shoulders above the rest. These "stars" have something extra and this is attributed to their unique genetic make-up.
The same principle applies to CHS ( common horse sense). You are either born with it or you try to cultivate it. Again, the guy born with it will have an edge over the one who has cultivated it. Let us now explore this in some detail.
Example no.1
Let's take a small converting company that does a million dollars in sales per year. (gross sales). Assume that the net profit is 10% of gross sales. That means that this company is making a net profit of $100,000 per year. The owner sees that things are looking good and that he should expand. To this end he starts out by hiring a new salesman. The going rate for a good salesman is $50,000 a year. Add all the travel expenses, insurance, car expense, other expense etc. and this adds another 30,000 dollars
for a total cost of $80,000 a year for this new salesman.
To remain at the same level ( $100,000 net profit) the company now has to generate an additional $800,000 in business. This is almost double the production levels of the previous year. Think about it. You have to double your output....yet nothing really changed as far as the bottom line is concerned. To double your production two things have to happen. One your machine operators suddenly start producing twice the product in the same time or you start a second shift. By starting a second shift you have to figure out the additional man power and operating costs.
Assume your labor cost per year is $500,000 a year. Starting a second shift will add another $500,000 to your costs.
Ignoring this simple fact is the leading cause of failure. Owners lacking this CHS will go ahead with hiring a new salesman without any thought to realities on the ground.
Hiring a new salesman can actually put you out of business. Think about it. The rule of thumb for hiring a new salesman should be as simple as ABC. The salesman should generate enough business to pay his own expenses plus contribute a hefty chunk to the bottom line. If this is not happening in your business, then you are in serious trouble.
First things first:
The most obvious place to start is on your production floor. Analyse everything. How much is each slitter rewinder producing per shift. Do these calculations for every piece of equipment in your plant. You should have these facts on your fingertips. For example Sheeter no.1 generates $200 per hour net profit. Reduce every machine to net profit per hour basis. This will give you a vivid picture of how everything in the plant is functioning.
The best way to improve the bottom line is to increase production. How do you double production? Triple it? Increase it 10 fold? Is this possible? The answer is a resounding yes.
