The ideas, concepts and strategies I advocate for adoption in this article are based on proven practice. In fact, the case study and specific analogies used are based on real-life activities that I personally partook in over a period of six years, as a manager in a large blue-chip multinational brewing company. Read my article titled "Use Custom Automation Of Your Spreadsheet Reports To Drive Down Costs And Increase Your Profits" for additional details of my experiences in this area, while in paid employment.

What you learn from reading the above mentioned article, will hopefully encourage you to seriously explore ways to put the information provided in this article to good use for your business. The principles described below can be successfully adapted to virtually any business operation - be it service or production based.

If you need any help with thinking up ways/means of putting them to use, I would be pleased to help out.

Case Study

"Because its purpose is to create a customer, the business enterprise has two - and only these two - basic functions: marketing and innovation. Marketing and Innovation produce results. All the others are costs" - Peter Drucker

What follows is a bit of a simplistic example, but it serves the intended purpose of providing a basis for the following discussion. The logic on which this analogy is based can be applied to any situation.

African Arts Concepts Limited (a hypothetical company) uses three raw materials, A, B and C in producing their flagship brand Product Z – which sells for N14,000 naira (about $100 equivalent, using a N140.00 Naira to $1.00 US dollar currency conversion rate) per unit - in the following combination:

5 lengths of material A(N2,500.00) + 1 kg of material B(N1,500.00) + 20 pieces of material C(N,2500.00) = 1 unit of Product Z(N6,500.00 Naira or $46.43 US Dollars).

Assume other (say operational and marketing) expenses amount to N500 per unit of Product Z , the Cost Price for one unit would be N7,000.00($50.00) - approximately. That means whenever 1 unit of Product Z is sold, a gross profit of N7,000 (N14,000 – N7,000) or $50.00 USD is made by African Arts Concepts Ltd.

THE PROBLEM (Common To Many Businesses)

Now imagine that a staff of African Arts Concepts Limited begins to over use (and this does happen!) material B by say 0.5kg for every unit of Product Z. The usage cost for(i.e. cost of using) Material B per unit of Product Z produced will become N2,250(N1,500.00 plus N750.00) .

5 lengths of material A(N2,500.00) + 1 kg of material B(N1,500.00) + 0.5 kg of material B(unrecorded N750.00 usage cost ) + 20 pieces of material C(N2,500.00) = 1 unit of Product Z(N7,250.00 Naira or $51.79 US Dollars).

Adding the other (operational and marketing) expenses of N500 per unit of Product Z, would bring the cost price/unit of Product Z to N7,750($55.4 USD), instead of N7,000($50.00 US Dollars). In otherwords, the company incurs an – unnecessary - N750 or $5.4 US Dollars additional cost to produce EACH unit of Product Z.

That extra $5.4 would most likely be LOST because:

(a). African Arts Concepts Limited may not detect it - except they have monitoring systems(e.g. a custom automated Variable Cost Analysis Spreadsheet) set up to alert them to such occurrences.

That batch of Product Z will therefore still be sold for $100.00 US Dollars per unit(a 20% LOSS).

(b). Even if it is detected, little can be done to correct it for batches that would already have been produced BEFORE discovery/correction of the problem.

Multiple Negative Consequences

If continued unchecked, this over usage can quickly cause huge losses: Multiply the N750 naira ($5.4 USD) over usage by say 1000 units of Z produced in a month and you get N750,000($5,400 USD) – lost unknowingly.(That $5,400 USD over usage equates to losing 54 market ready units of Product Z!).

What will typically happen is that at the end of the month, the company would find that they have 500kg LESS of material B left than expected. This would subsequently require them to make an additional unplanned purchase of material B using money budgeted for other purposes - thereby disrupting cash flow etc.

The foregoing is one major reason why some businesses that appear to be doing well suddenly go under, or record low profits/losses! They fail to keep a grip on their real costs of operation. What has been described here is applicable to virtually any type of business – be it service or product based. One only needs to change the items of income and expenditure considered in delivering the relevant product/service.

Question: How Do I Prevent A Problem Like The One Above Happening To Me?

Answer: By Adopting Variable Costs(VC) Monitoring/Control Techniques.

I like to think of Variable Costs, from a lay man's perspective, as those expenses you incur, which can(and do) vary depending on your ability to find cheaper yet equally - if not more - effective ways to do what you do, when compared to your current methods.

To implement a VC Monitoring/Control system, you can follow the steps outlined below - making needed adjustments to suit the peculiarities of your unique situation or need (Note that the use of spreadsheets is integral to the approach I recommend, as it facilitates sustainability of systems set up).

Step 1 : Collate Relevant Data in Spreadsheets : Start recording and analysing your business revenue and daily operating expenses, including variable cost elements such as how much you spend on marketing, transportation, phone calls, materials usage etc. You can easily do this by creating Excel spreadsheets with raw data entry interfaces linked to standard reporting templates(which generate meaningful output from formulas applied to your raw data).

For best results, you might find recording materials usages in the same spreadsheet, with their corresponding prices helps in deriving expenses relevant to materials usages(by simple linking of cells to be multiplied e.g. "Kgs" used by price per kg).

Step 2 : Benchmark Your Process : You will also need to do some benchmarking by obtaining detailed industry data for businesses similar to yours. Using that data, you would derive weighted averages, upper and lower control limits etc. These could then be charted in your spreadsheet using actual data you would periodically post. Your objective in managing your business/process would then be to ensure your Key Performance Indicators(KPIs) fall between the established control limits implying that it is performing optimally.

If during your daily, weekly or monthly recording and monitoring, you then notice any of your charted KPIs deviating outside the favourable range, you would be able to quickly investigate and correct the problem before it goes too far. In the case study used above for example, if a target usage rate of material B per unit of Product Z produced had been routinely recorded in a spreadsheet, and plotted on say a Schewart chart, the CONTINUOUS over usage of 0.5kg per unit would have reflected in the slope of the chart - and therefore led to early detection.

Again, this is a simplistic approach. More effective methods(e.g. automated plotting of a Cusum - Cumulative Sum Deviation chart) can be easily employed using spreadsheets with about the same effort. I cover Cusum charts, and how to use them, in considerable detail in my forthcoming article titled “Simple Performance Measurement/Process Control Tools You Can Use In Your Business”.

Question: Okay, That’s To Detect/Stop Things Getting Out Of Hand. But HOW Exactly Do I Go About INCREASING My Profits Without Raising My Prices?

Answer: By Applying Practical Variable Costs(VC) REDUCTION Techniques.

As I earlier stated, your variable costs are those expenses you incur, which can(and do) vary depending on your ability to find cheaper yet equally if not more effective ways to do what you do, when compared to your current methods.

By implication therefore, a VC REDUCTION Strategy is bound to make a difference to your bottom line profits.

Adopting this strategy means you will actively encourage/engage in the routine search for quick, easy, practical, inexpensive, and sustainable ways to drastically cut down on the expenses required to make and/or deliver your products and services to those who want them.

The foregoing underscores Peter Drucker’s assertion that Marketing and Innovation are the two basic functions in any business which can enhance its profitability. All others are costs.

Therefore To Increase Your Profits Without Raising Prices :

1. Increase Your Marketing (While Reducing Your VC): Find more NEW customers more frequently. But in doing so, think up cheaper and more effective/efficient ways to reach more people who fit your target audience profile. Even if you already have a website, chances are there are still a number of viable ways you could use it to achieve this purpose, that you are YET to explore. Take it from me. I get so so much done at little or no extra expense using my website resources more creatively.

One reason why this is possible is because I have devoted hundreds of hours to learning web design, custom CGI programming and web marketing techniques.

If you actively work to find new customers, you create a growing pool of clients from whom you can generate referrals and repeat businesses resulting in higher sales volumes/turnover. Also, it helps you cover gaps that will occur periodically from client attrition or turnover.

Use Your Website More Effectively: Traditional methods of business marketing and advertising can be quite expensive especially when used for protracted periods. The dilemma of the business owner who seeks increased exposure therefore tends to be, finding a reliable way to stay in touch with(or visible to) her target audience without going bankrupt.

The answer, from my experience lies in learning how to intelligently leverage technology and the Internet to complement the marketing efforts being made offline, in a way that cumulatively lowers overall expenses incurred - resulting in increased profits over time. Read my article titled "Zero Cost Methods To Boost Your Business Marketing and Cuts Your Costs Using Your Website" for tested and proven ideas, methods, tools and resources you can use.

2. Innovate More (By Reducing Your VC) : Actively work to discover and implement quicker, cheaper and easier ways to deliver the same products/services to those who want them. Assume you previously could only turn out 1000 units of your product per month at a cost of $5.00 per unit(to sell at $5.75 per unit). Then following a change in your procedures, suggested by one of your employees - who gets rewarded accordingly :-) - you are subsequently able to routinely churn out 1500 units per month at the same

THE PROBLEM (Common To Many Businesses)

Now imagine that a staff of African Arts Concepts Limited begins to over use (and this does happen!) material B by say 0.5kg for every unit of Product Z. The usage cost for(i.e. cost of using) Material B per unit of Product Z produced will become N2,250(N1,500.00 plus N750.00) .

5 lengths of material A(N2,500.00) + 1 kg of material B(N1,500.00) + 0.5 kg of material B(unrecorded N750.00 usage cost ) + 20 pieces of material C(N2,500.00) = 1 unit of Product Z(N7,250.00 Naira or $51.79 US Dollars).

Adding the other (operational and marketing) expenses of N500 per unit of Product Z, would bring the cost price/unit of Product Z to N7,750($55.4 USD), instead of N7,000($50.00 US Dollars). In otherwords, the company incurs an – unnecessary - N750 or $5.4 US Dollars additional cost to produce EACH unit of Product Z.

That extra $5.4 would most likely be LOST because:

(a). African Arts Concepts Limited may not detect it - except they have monitoring systems(e.g. a custom automated Variable Cost Analysis Spreadsheet) set up to alert them to such occurrences.

That batch of Product Z will therefore still be sold for $100.00 US Dollars per unit(a 20% LOSS).

(b). Even if it is detected, little can be done to correct it for batches that would already have been produced BEFORE discovery/correction of the problem.

Multiple Negative Consequences

If continued unchecked, this over usage can quickly cause huge losses: Multiply the N750 naira ($5.4 USD) over usage by say 1000 units of Z produced in a month and you get N750,000($5,400 USD) – lost unknowingly.(That $5,400 USD over usage equates to losing 54 market ready units of Product Z!).

What will typically happen is that at the end of the month, the company would find that they have 500kg LESS of material B left than expected. This would subsequently require them to make an additional unplanned purchase of material B using money budgeted for other purposes - thereby disrupting cash flow etc.

The foregoing is one major reason why some businesses that appear to be doing well suddenly go under, or record low profits/losses! They fail to keep a grip on their real costs of operation. What has been described here is applicable to virtually any type of business – be it service or product based. One only needs to change the items of income and expenditure considered in delivering the relevant product/service.

Question: How Do I Prevent A Problem Like The One Above Happening To Me?

Answer: By Adopting Variable Costs(VC) Monitoring/Control Techniques.

I like to think of Variable Costs, from a lay man's perspective, as those expenses you incur, which can(and do) vary depending on your ability to find cheaper yet equally - if not more - effective ways to do what you do, when compared to your current methods.

To implement a VC Monitoring/Control system, you can follow the steps outlined below - making needed adjustments to suit the peculiarities of your unique situation or need (Note that the use of spreadsheets is integral to the approach I recommend, as it facilitates sustainability of systems set up).

Step 1 : Collate Relevant Data in Spreadsheets : Start recording and analysing your business revenue and daily operating expenses, including variable cost elements such as how much you spend on marketing, transportation, phone calls, materials usage etc. You can easily do this by creating Excel spreadsheets with raw data entry interfaces linked to standard reporting templates(which generate meaningful output from formulas applied to your raw data).

For best results, you might find recording materials usages in the same spreadsheet, with their corresponding prices helps in deriving expenses relevant to materials usages(by simple linking of cells to be multiplied e.g. "Kgs" used by price per kg).

Step 2 : Benchmark Your Process : You will also need to do some benchmarking by obtaining detailed industry data for businesses similar to yours. Using that data, you would derive weighted averages, upper and lower control limits etc. These could then be charted in your spreadsheet using actual data you would periodically post. Your objective in managing your business/process would then be to ensure your Key Performance Indicators(KPIs) fall between the established control limits implying that it is performing optimally.

If during your daily, weekly or monthly recording and monitoring, you then notice any of your charted KPIs deviating outside the favourable range, you would be able to quickly investigate and correct the problem before it goes too far. In the case study used above for example, if a target usage rate of material B per unit of Product Z produced had been routinely recorded in a spreadsheet, and plotted on say a Schewart chart, the CONTINUOUS over usage of 0.5kg per unit would have reflected in the slope of the chart - and therefore led to early detection.

Again, this is a simplistic approach. More effective methods(e.g. automated plotting of a Cusum - Cumulative Sum Deviation chart) can be easily employed using spreadsheets with about the same effort. I cover Cusum charts, and how to use them, in considerable detail in my forthcoming article titled “Simple Performance Measurement/Process Control Tools You Can Use In Your Business”.

Question: Okay, That’s To Detect/Stop Things Getting Out Of Hand. But HOW Exactly Do I Go About INCREASING My Profits Without Raising My Prices?

Answer: By Applying Practical Variable Costs(VC) REDUCTION Techniques.

As I earlier stated, your variable costs are those expenses you incur, which can(and do) vary depending on your ability to find cheaper yet equally if not more effective ways to do what you do, when compared to your current methods.

By implication therefore, a VC REDUCTION Strategy is bound to make a difference to your bottom line profits.

Adopting this strategy means you will actively encourage/engage in the routine search for quick, easy, practical, inexpensive, and sustainable ways to drastically cut down on the expenses required to make and/or deliver your products and services to those who want them.

The foregoing underscores Peter Drucker’s assertion that Marketing and Innovation are the two basic functions in any business which can enhance its profitability. All others are costs.

Therefore To Increase Your Profits Without Raising Prices :

1. Increase Your Marketing (While Reducing Your VC): Find more NEW customers more frequently. But in doing so, think up cheaper and more effective/efficient ways to reach more people who fit your target audience profile. Even if you already have a website, chances are there are still a number of viable ways you could use it to achieve this purpose, that you are YET to explore. Take it from me. I get so so much done at little or no extra expense using my website resources more creatively.

One reason why this is possible is because I have devoted hundreds of hours to learning web design, custom CGI programming and web marketing techniques.

If you actively work to find new customers, you create a growing pool of clients from whom you can generate referrals and repeat businesses resulting in higher sales volumes/turnover. Also, it helps you cover gaps that will occur periodically from client attrition or turnover.

Use Your Website More Effectively: Traditional methods of business marketing and advertising can be quite expensive especially when used for protracted periods. The dilemma of the business owner who seeks increased exposure therefore tends to be, finding a reliable way to stay in touch with(or visible to) her target audience without going bankrupt.

The answer, from my experience lies in learning how to intelligently leverage technology and the Internet to complement the marketing efforts being made offline, in a way that cumulatively lowers overall expenses incurred - resulting in increased profits over time. Read my article titled "Zero Cost Methods To Boost Your Business Marketing and Cuts Your Costs Using Your Website" for tested and proven ideas, methods, tools and resources you can use.

2. Innovate More (By Reducing Your VC) : Actively work to discover and implement quicker, cheaper and easier ways to deliver the same products/services to those who want them. Assume you previously could only turn out 1000 units of your product per month at a cost of $5.00 per unit(to sell at $5.75 per unit). Then following a change in your procedures, suggested by one of your employees - who gets rewarded accordingly :-) - you are subsequently able to routinely churn out 1500 units per month at the sam