Introduction: So you want to maximise the profitability of your business and make more money.
I am about to show you how to increase profit generation and increase the value of your business. Before we begin, we should define a few terms which you may hear people mention when they talk about profitability.
What is Profit (also known as profit margin)
Profit is income from trading less costs incurred to perform that trade. When this is a positive number the business is said to be profitable. When the number is negative the business is said to be trading at a loss. This is true for all businesses, no matter their size. In a small business getting to these figures should be straightforward.
What is Gross Profit Margin
Gross Profit or Gross Margin is the difference between the sale price and the cost of goods sold (COGS = Cost of Goods Sold). For example, if I buy a car for £1000 and sell it for £2500, the gross profit is £1,500.
What is the Bottom Line
This relates to the figure on the bottom line of a traditional Profit and Loss (P&L) Account. This shows all your income and all your costs, the final number on the bottom line being the money you are left with, ie the profit. You will hear people say things like “he only worries about the bottom line”, which means the money the business will make.
What is Not for Profit Business
Some businesses operate to provide a service to the community or society as a whole. They are often described a ‘not for profit’. This really just means that they don’t seek to return a profit to their owners (shareholders). Usually, they also don’t seek to charge any more than necessary for their services, so they minimise the money they are making. Most not for profit businesses will build up cash reserves instead of returning a profit to the owners. There are then usually policies about how these reserves should be managed and used to the benefit of the customers of the business.
Why is Profit important?
A business that does not generate a profit is not sustainable. It will eventually run through the money the owners have loaned the business to get it started. If this happens it may be possible to borrow money or secure more investment if there is sufficient evidence of trading profitably in the future. It is not unusual for a business not to make a profit for the first few years of operation. For example, Amazon didn’t make a profit for several years as all the money generated from Sales was reinvested into the business to recruit staff, build systems, warehouses, marketing etc.
How do you increase profit in a business?
This is deceptively easy, there are only two ways to make a business more profitable. Increase Sales and/or Decrease Operating Costs. It really is that simple, let me repeat myself, to drive up profit make more sales and/or have fewer costs.
If you have a business that is generating a good level of Sales on a recurring basis, then focusing on reducing costs may be the best option. On the other hand, if it’s a small business, with minimal costs you will need to focus on increasing headline sales. Good businesses have people or teams focused on minimising costs and maximising Sales.
In the rest of this article, I will focus on the best ways to drive up sales and ways to reduce costs.
Ideas for reducing operating expenses in your business
- Establish a contracts database. This can be a simple spreadsheet in a small business. It is a list of all your contracts with customers and suppliers. In this case, focus on the supplier contracts. For each contract detail the supplier, the contract end date, the date notice needs to be given if you wish to terminate the contract, the cost in the current year, previous years and the forecast cost for next year. Once you have a list of all your contracted costs you can sort this and apply an 80/20 split. This means sorting the list of contracts by value and look at the top 20% of contracts which account for 80% of the total annual cost.
- Once you understand where 80% of the contracted cost in your busines is coming from you need to negotiate better rates. There is an old expression, “If you don’t ask you don’t get”. Start by letting the supplier know that you are reviewing all your contracts and ask what they can do to lower the cost for you. Have a look around for alternative suppliers and consider retendering this business. I have found that even if I stay with the incumbent supplier, negotiating a 2 year contract renewal instead of a one year, will usually attract a 5% to 10% discount and avoid an inflationary price increase in year two. This is a great way to reduce cost.
- After the top 20% of contracts have been reviewed, insist that all remaining contracts are reviewed a month or two before the termination/notice date. Consider if the service is really needed. Can services be bundled together with one supplier to drive a better deal? If you have multiple contracts with the same supplier, can they be merged onto one new contract with better terms?
- Have a strict policy for new contracts to ensure your business gets competitive quotes for each service. This is an easy way to buy raw materials and services at minimal cost.
- Make sure you have a simple employee expenses policy. This needs to make it clear what you consider to be reasonable. I would advise that you don’t scrimp or be unreasonable with this or you risk upsetting your staff. If you lose the good will of your staff it will cost you a lot more.
- Make sure all managers with permission to make ad-hocs purchases have a clear budget to work within.
- Understand your fixed and variable costs. Fixed costs are things which stay the same no matter how much business you do. For example, if you run a flower shop, your rent doesn’t increase if you double your sales of flowers. Variable costs on the other hand do increase in line with sales. Continuing the flower shop example, as the sales increase the amount of wrapping paper and packaging also increase. Fixed costs can be good in a growing business but if sales suddenly take a dive, they can really affect your profitability and even the viability of your business. Many small businesses had to close during the Covid-19 pandemic when they could not trade and found they had no income to cover their fixed costs.
- If sales are in decline, maybe after you have lost a contract, make sure all budgets expense budgets for the remainder of the year are reforecast and adjusted down at least proportional to the loss. You may also want to build in some challenge to reduce cost for the remainder of the year to offset the loss in sales.
- If you have too many full-time employees for the current amount of work going through the business, you may ultimately have to let some staff go. This can be expensive with legal and redundancy fees. In the short term, consider a Holiday Purchase Scheme for staff. These schemes allow staff to buy additional days holiday from the business, reducing what you need to pay them, whilst retaining their skills for the longer term. You maintain control over which days can be booked to you can better manage resource to workload. Employees usually see these schemes as a perk, allowing them to take extra or extended holidays.
- Like holiday purchase, consider having a without prejudice conversation with employees to see if anyone who is contracted to work five days a week would like to step down to 4 days a week. This won’t suit everyone, and many people simply can’t afford to only work 4 days a week. In most business I’ve worked with a few people will opt for this, and that gives you an instant 20% saving on their salary. These people, if you treat them well will often be willing to still work an extra day at peak times and to cover sickness etc.
- Review your premises. Do you need the premises you currently operate from? Could your business switch to everyone working from home? Do you need the size of premises you currently have? Do you need to be in your current location? If you can work remotely, you probably should. This gives so many benefits beyond just the saving in rent and rates. If your current premises are not ideal, look around for lower cost, out of town locations. Sometimes it’s possible to relocate a few miles into an enterprise zone and attract low rates or additional funding to grow your business.
- Minimise the stock you hold. Some businesses hold thousands of pounds of stock, and some of that stock is gathering dust. Generally, stock doesn’t get more valuable the longer it sits in the storeroom. Can you sell off any surplus stock? Can you reengineer your processes so that you don’t need to hold stock or more than a week’s worth of stock? I worked with a food producer who had a large, automated factory. In their parts store they had thousands of pounds worth of spares, some for machines they no longer used. The company had an overdraft with the bank and a finance facility to smooth their cashflow over the year. Cash was therefore tight and relatively expensive for them. We were able to put maintenance out to tender and outsource all the machine maintenance activities. The maintainer bought the existing spares as part of the deal to win the contract. We also insisted in the contract that they keep on site a spare parts kit for the most critical machines and those with the highest failure rate. If this sort of project is done well, you can improve service, reduce finance costs, reduce capital tied up in inventory and improve your flexibility as a company.
- Optimise postal / delivery costs. If deliver of orders to customers is a big part of your business do make sure you negotiate these services every year. If customers are placing lots of small orders, find ways to get them to add one or two more things to their orders to improve the order value to carriage cost ratio.
- If you are sending out orders, review your carton fill rates. I’m sure we have all received a delivery from a company with a small item in a large box. This happens thousands of times a day around the world. Every time an item is sent in a carton which is larger than it needs to be it erodes your profit margin.
- Save power costs around the business. This will save you money and is good for the environment. I’ve been in offices where at one end of an office someone has a heater on and at the other end someone has the air conditioning set to max. I’ve also seen many offices with all the lights left on late into the evening. Photocopiers, LASER printers, Monitors etc left switched on all night. Instil in your team a need to be environmentally friendly, minimising your carbon footprint and save money. Try and be a lean green business.
- Boost productivity of each full-time employee. Make sure your staff have the tools they need to be successful and hyper productive. In many small businesses I find staff using PC’s which are ancient, or out of date, incompatible software. Have a replacement policy and replace PC’s / Mac’s which are over 6 years old, maybe less depending on the work that’s being done. I personally like 6 years, as most businesses will depreciate PC’s and Mac’s over 3 years, which then lets you sweat the asset for another 2 or 3 years. Certainly, if you buy Mac’s you can expect to get 6 years use out of them and can probably still sell them on ebay after 6 years – making sure the data is wiped before you sell it. Likewise with software. I have seen people waste ages with incompatible versions of Word, Excel and PowerPoint in the same company. Just get everyone one onto an Office 365 Subscription. The staff will appreciate this, and it means you will always be running the latest and greatest version of Office. Are there specific tasks which take a long time and which could be automated? If staff are doing anything several times a day you should see if there are more efficient ways to do the same thing.
- Do you need support functions such as HR, IT and Accounts? In the case of HR, consider devolving this responsibility to managers and back them up with a support contract from a local law firm. While you are negotiating an HR support contract, get them to include contract review support as well. Depending on the business IT can also be outsourced, more on this shortly. Accounts can also be outsourced to a local firm of Accountants. This all reduces the number of staff on the payroll and the overhead of recruitment, sick pay, training, redundancy costs etc. In modern businesses minimise these in house support services and maximise your investment in the creative talent that is creating value and IPR for your business.
- If you are still buying IT equipment, ask why. With few exceptions data is now better stored in the cloud with reputable services such as Microsoft Azure and Amazon AWS. These days these vendors can also offer your virtual desktops in the cloud which can be accesses via lower powered laptops. If you are buying laptops, then investigate leasing options which include maintenance and preloading the required software for new employees – so you don’t need someone sitting in IT doing all of this for you.
- If you are still running an on-premises telephone switchboard, consider scrapping it. With the move to remote working many staff now just use mobile numbers or communicate via Teams internally and with customers. Microsoft Teams also offers an integrated Telephone System. This will almost certainly be more cost effective than paying maintenance for an on-premise switch board and a number of handsets.
- When was the last time you renegotiated your mobile phone contract? If you have several employees with mobile phones, you should renegotiate the contract every 3 years. Consider if your business needs to supply mobile phones to staff. Everyone has their own phone, and it can be preferable to just pay an allowance for them using their own phone – this is commonly known now as BYOD (Bring Your Own Device). Many staff prefer this as it saves them carrying around two phones. In my experience staff also look after their own phones more than phones provided by the company.
- Measure everything. There’s an old saying, “If you can’t measure it, you can’t manage it.”. Don’t go over the top, but once you understand your variable costs and sales identify what affects these. If something drives cost in your business, it should be a KPI.
- Benchmark your business against similar businesses and understand the industry average for each figure. I will write a separate article about Benchmarking.
- Review your product & services portfolio: Understand the cost of each service or product your business provides to customers. You should make sure that every service/product you provide generates a suitable profit. Some businesses fall into the “Busy fools” trap, by doing high volumes of very low margin or loss-making business. I’ve even seen business pay staff overtime to service this low margin / loss making sales. Make sure the business is focused on selling the most profitable lines. If you have low margin or loss-making services which are popular, see if they can be reengineered to become profitable. If you can’t you must stop offering those services. If you get to that position and need to stop providing the service, see if you can sell the contracts or that part of the business to someone else. Another business may be able to find synergy savings by combing this existing trade with theirs and therefore find value in what are loss making lines for you.
- It is a lot more expensive to win new customers than retain and optimise existing customers. Consider shifting some of your investment from selling to new prospects to ‘customer success’ and optimising the sales and services to existing customers.
- If your business makes things, have a clear inventory of the raw materials and what they should cost. Work to lower the cost of these raw materials to improve your gross margin.
- Understand all your labour costs. If you can’t keep people busy 100% of the time it is often cheaper to outsource work.
Ideas for increasing sales revenue and sales margin in your business to increase profit
- If you haven’t already got a website, you need to get one. Don’t rely on having a Facebook page as your only online presence or just selling off eBay or Amazon. You need to own your own digital landscape. If you have no website at all, then getting a small business website up and running with a domain name, hosting, maintenance, and a simple design which clearly states what your business does, where it does it, your contact details and opening hours will immediately be of benefit. Don’t skimp on this, expect to pay £500 – £1000 for a basic site. Don’t try and do it yourself with services like Wix because it always takes a lot longer than you expect, it isn’t what you went into business to do and it’s very unlikely to be an efficient use of your time.
- If you have a website and haven’t already, hire someone to do an SEO (Search Engine Optimisation) review of your website. Many websites look nice but are difficult for Google to index. Sometime even a small SEO project can make a big difference. If you are not on page one of Google, then hardly anyone will find your business online. If you are in the top half of the first page on Google, you will get 80-90% more clicks than being on the bottom half.
- Register for Google My Business to improve your visibility online.
- Make sure your business can be found on Google Maps, Apple Maps and Bing. They all have ways to add missing businesses.
- If you have a website post updates via a blog as often as possible. If you have a new product, if you answer a question, if you have a special offer post a blog about it.
- Don’t over do social media but pick one ie Facebook, Instagram or Twitter and post links to the blog posts on your website. This way you are driving people back to your site.
- Develop a mailing list of customers for your newsletter. When you make a sale, ask the customer if you can have their email address so you can add them to your newsletter. WordPress can be set-up to mail your mailing list a summary of all your new blog posts on a weekly or monthly basis. This is a low-cost way to stay in touch with your customers and keep them engaged.
- Keep things fresh. If you have a shop or office where you meet customers give it a lick of paint. Repaint a wall in the entrance, reception, meeting rooms etc makes things looked cared for, loved and thriving. If your business provides customer toilets / washroom, make sure they are spotlessly clean, stocked well with towels, soap and well ventilated.
- Brand everything. Make sure whatever you give your customer, it clearly has your company name and contact details on it. I frequently receive emails from some very nice-looking hotels, and I’m constantly amazed at how many forget to say where they are based, the fact your hotel is called “The Manor” means nothing to me.
- Find ways to sell services and products on a recuring revenue basis rather than one off sales. Constantly having to find new customer is expensive and time consuming so better to find more ways to sell to your existing customer, this is a key strtegy when considering how to increase profit.
- Can you charge an annual membership for access to a higher tier of service? Amazon Prime is a classic example of this. Many gyms and health clubs have drop-in rates but provide extra benefits for people who pay a membership.
- Once you have your website and SEO sorted out consider running a few campaigns on Google Adwords. You may want to talk to your SEO expert about this as the two activities should be aligned.
- Check your signage. Can potential customers spot your business as they walk past or drive past. Putting an ‘A” board outside some businesses can make a massive difference.
- Check your shop window. If you have a shop, café or restaurant, does the offering look friendly, efficient and understandable from the front? For smaller local businesses take pride in refreshing the window display on a regular basis, at least with each season. Take pictures of the window display, blog about it and post to social media.
- Identify customers who haven’t ordered recently and get in touch to see if you can help them. Explain new products / services and have a deal to entice them back.
- Identify customers who place regular seasonal orders. Make contact with them a few weeks before they normally order and make sure they have your latest details and offers etc. This helps to secure their repeat business and makes them feel cared for.
- Offer incentives to customers for bulking up their orders. Increasing your average order value by just a few pounds per order can be transformative, especially if it doesn’t increase your carriage costs.
- Review your prices. You should aim to, as a minimum increase your prices by the RPI (Retail Price Index) rate of inflation on an annual basis. If you don’t increase your prices, you are making your products cheaper in real terms. On the other hand you should establish what is a good profit margin for each product and make sure you are not overcharging for it. If you get a reputation for being expensive or uncompetitive it will damage your business in the long run.
- Small business owners should identify who your customers are. For example, one business had some large orders from a local care home. They then phone a few more care homes to introduce their services and gained 3 new customers in one week.
- Diversify, by considering what else you could sell to existing customers without increasing your fixed costs. Training, maintenance, aftercare, consultancy, design and installation etc. Depending on your expertise and experience you may also be able to create online training courses for your niche.
- Make sure your sales people know which products / services have the highest profit margins so they spend their time selling those and maximising sales revenue. They should also understand the average profit margin and know which products need to be sold through quickly. Each sales person should be able to tell you the most profitable products in your business off the top of their heads. Do make sure team members are working as a team and not competing with each other in a negative way.
- Review your sales process. If you have two or more salespeople, get them working together to understand what works and what doesn’t. The sales process for your business should constantly be tuned as you learn more with each success and failure.
- Do some market research to understand what your customer base want and what they think about your services. Market research can also often be written up as an interesting press release or story for local media.
- Run a customer satisfaction survey. Customers love being asked how the service was and you will learn a lot from this which can only help with customer retention.
- Make sure your team know your current customers by name as far as possible and make sure they greet them by name.
- Ask your staff for ideas. Many sales people will have worked in similar businesses and may have seen other products and services which you could offer. Just because it’s your business doesn’t mean only you can have good ideas. Ask them if they know of profitable businesses you could be selling goods and services to.
- Create a document which explains your business plan and business model. Use this to brief new staff so they know what is required. Once staff understand the business and the pressure it is under, they are better able to support you.