One of the ultimate objectives of a business implementing a Quality Management System to meet the requirements of ISO 9001:2015 is to see an improvement in the bottom line. While it’s important to improve internal management, customer relationships, and the standards and processes in place, if the business cannot achieve a return on investment, then it would be pointless to pursue in the first place.
If ISO 9001:2015 implementation is done properly, all businesses can expect an improvement in their financial performance. This can be achieved through:
To maintain effective implementation in meeting the ongoing requirements of ISO 9001:2015, the standard requires the business to regularly monitor and evaluate all the business processes and their effectiveness, and this includes the financial processes.
The financial performance of a business relies on two major components, revenue and expenses. A business can generate revenue through the usual course of business (such as sales) or non-usual means (such as gain on sales of fixed assets). Business expenses can be broken down into several categories, in order to more effectively monitor and evaluate them.
Expenses, wherever allocated – to sales, production, or operational – can always be categorised to either fixed expenses or variable expenses.
Fixed expenses are described as expenses that don’t change, even though there may be changes in production levels or sales volumes. The most common example for this category is rent expense. It doesn’t matter how much your production levels or sales fluctuate; your rent will remain the same. Another example is salaries – these are generally a fixed expense, since you’ll pay your employees the same amount regardless of their productivity. However, overtime, bonus or commission payments can be categorised as variable expenses, as these are generally increasing when sales and/or profit margins are increasing.
Variable expenses, on the other hand, are fluctuating depending on your sales and production levels. Cost of sales or cost of goods sold is the most obvious variable expense. However, there are a few variable expenses that are sometimes overlooked by businesses, such as bank surcharges when customers are making payment via credit card or delivery fees to customers. Understanding your variable expenses is very important to ensure that you don’t unconsciously set your products or services price below your variable cost.
Controlling and monitoring business financial performance can be achieved by creating a budget spreadsheet that reflects your actual performance. Your sales figures can be estimated by comparing with historical performance, or your actual forecast based on numbers of sales that you can expect to flow into the business. Be careful not to insert your potential clients/business, as it could lead to a biased result and misinterpretation. When you insert only your actual and expected sales, you will see if your sales figures can actually cover your expenses or not and, as a result, adjust the sales targets for the sales team accordingly.
Controlling and monitoring expected cash outflow from the business is much easier. One way to effectively monitor and control your expenses is by regularly evaluating your suppliers to see if their price and quality are still competitive and reasonable, or, evaluating if you should browse for another supplier. The most important thing for expense controlling is stick to what is originally budgeted.
Apart from the quantitative components of the financial performance of a business, there is one more cost that is not in the profit and loss and is often overlooked by management. It’s an opportunity cost.
Opportunity cost is the loss you make when you choose one alternative over another. For example, when you decide to produce Product A that will generate $500,000 in sales and $40,000 in profit, but, as a result, you sacrifice the production of Product B that may only bring in $400,000 in sales but provides $50,000 profit, resulting in an opportunity cost of $10,000.
Before making any managerial decisions, it’s essential to understand all the facts and related costs, both the visible and the invisible.
Understanding your business revenue stream and cost structure as part of your planning, evaluating and monitoring processes will certainly help the business achieve its objectives, increase its financial strength, and improve the chances to seize opportunities that present themselves, which is essential to continue to adapt, gain competitive advantage and survive in today’s ever-changing business environment.
If you are interested in ISO 9001:2015 Certification, you can find the details here or contact us on 1300 614 007.