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By Harvey A. Goldstein

Profit enhancement requires becoming more effective, rather than just cutting costs. It requires a systematic approach to improving profitability at all levels of planning, management and operation.

Below is a plan to achieve greater profitability.

Step 1: Determine profitability of each product or service.

Most businesses have bookkeeping, computerization, etc., in order to determine profitability of the past, but few businesses are spending adequate time in determining what profits and cash flow will be in the future.

Even accountants spend most of their time looking to see “what happened” after several weeks or months after the fact, but in the ’90s and beyond, it is absolutely necessary for management to start focusing on where they’re going.

What kind of profits will they have in the future? When will they run out of cash? How much will they need? Where will they get it?

Step 2: Focus attention on profits, not sales.

Owners know they’re in business to make a profit, but they seem reluctant to talk with employees about this need. When this issue is explained to employee groups, they understand that the company needs to make money in order to pay people, to maintain the facilities, to buy equipment and inventory, and to give owners a return on investment.

But do owners ever go to each employee and say, “The livelihood of 240 people depends on how well you do your job”? When everyone in a company starts thinking about profits instead of revenues, they identify and are more willing to get rid of problem customers or unproductive products.

Step 3: Share responsibility for profits with everyone in the company.

Profit is an attitude. Yet when everyone in the company, from the owner on down, is asked what their jobs are, they never say, “I’m responsible for profits.”

So put it into everyone’s job description.

Step 4: Don’t keep the company’s need for profitability secret.

If employees are kept in the dark about company profits, they only see revenues coming in. They often think the company is better off than it is. Remember, few companies are as profitable as they could be.

Unless they run a one-person firm, owners don’t know every way that resources are being wasted, or whether the company is missing a profit opportunity.

One accounts receivable clerk noticed that her company usually had to contribute to the ad campaigns of its retail customers. She wondered why the company didn’t ask its suppliers to support this advertising allowance.

She was given permission to approach vendors and raised $32,000 for the company.

Step 5: Encourage open communication.

One of the stumbling blocks to profit enhancement is the owner’s unwillingness to be open to employee ideas.

If that doesn’t change, neither will profits.

Often the controller or chief financial officer resists profit-enhancement ideas out of defensiveness that he or she should have spotted those ideas first.

Employees if ordered to take on another task will just add it to their to-do list, and that’s the end of it. But if they suggest an idea and are put in charge of implementation, they will make it a priority and succeed.

Ask everyone in the company to look at every possible way to improve the company. Then share the facts so everyone understands the problems and solutions.

When you do this, all kinds of ideas come out things that the owner will never think of on his or her own.

Step 6: Ask for five ideas to increase profitability.

In small groups of managers or front-line employees, challenge them to come up with ideas that will save tens of thousands of dollars, not just nickels and dimes.

One worker who washed trucks knew the manufacturer didn’t put its name on the trucks because it made private-label goods for other companies. The employee asked if any of the client companies would pay to have their names on trucks that travel nationwide.

The company got $50,000 from two different clients to put their names on the trucks.

Step 7: Evaluate staff productivity objectively.

Most companies don’t have performance benchmarks. They never tell employees the job standards, and they don’t know who’s a great worker and who’s a slacker.

Setting up measures of performance is only effective when you find a reliable way to collect data. In some companies, employees decide who earns the profit-sharing check. This way, if someone hasn’t done the work, fellow team members and the boss know it.

Step 8: Start the cycle again.

Improving profitability is a never-ending process. Many businesses go through this process every three years to assure that new employees and managers understand their roles in enhancing profits.

Harvey A. Goldstein is managing partner of Singer Lewak Greenbaum & Goldstein, an accountancy based in Westwood.

Small Business is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact Dan Rabinovitch at (213) 743-2344 with feedback and topic suggestions.