The history and future of our business has been shaped by three profit guidelines. The specifics of these guidelines vary from company to company, but the general philosophy is
Manage job margins at current levels. A critical element of our companys program is to ensure that we do not dilute our business with ever less profitable work, or that we do not allow the profitability of current work to decline over time. We aggressively and consistently review all jobs to make sure that we are maintaining our overall margins at all times. Awareness of individual job margins provides the key impetus for a company to identify trouble spots and develop solutions to reach this goal.
Capitalize on the inherent operating leverage of the business. This final guideline focuses on managing the resource growth of selling, general and administrative expenses (SG&A) and support activities. The key is to make sure that these resources grow at a slower rate than sales. The earnings before interest and taxes (EBIT) margin of our company today is about 10 percent.
The margin on incremental sales growth is about 20 to 25 percent because of the need for less incremental SG&A and support costs for that sales growth. The combination of our base EBIT margin plus our incremental EBIT margin will lead to an increased total EBIT margin for the company over time. Until the new base margin is at the same level as the incremental margin, this margin growth will continue. As long as the total EBIT margin is growing, total profits are growing faster than the revenue growth rate.
The most immediate profit improvement lever in practically any business is pricing. For a business with a 10 percent profit margin (a little better than average for the S&P 500), a 1 percent price increase will yield a 10 percent profit increase.
For a larger profit increase, say 50 percent, tactics are a bit different. While pricing is always a possibility, I would most likely focus on opportunities to capitalize on the inherent operating leverage of the business. Many costs of business (like corporate support costs, SG&A,
As an example, over the past five
However, much more important than short-term profit
Second, it is
Nearly all cost reduction initiatives must focus on personnel. There may be some manufacturing businesses where this is not so, but I expect that personnel and personnel-
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