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How To Beat The Credit Crunch Part II – Profit! October 1, 2008

Posted by liverpoolchamber in Business.
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Last week we introduced some tips from Freedom Coaching on how to protect your business from these economic hard times. This week, in part two, we get tips on how to focus on profit, attacking it from both sides – reducing costs and improving sales value.

Step 2

Focus of profit. The name of the game is to improve profit by attacking it at both ends, reducing costs and improving sales value.

Who are your most profitable customers, who are your least profitable customers?

  • What are your most and least profitable markets?
  • Which of your products and services are the most profitable, which are the least profitable?
  • Who are your most and least profitable employees?
  • What cost can we drive out of the business?
  • How can we improve our gross margin?

Use your answers to the above questions to make the necessary changes to increase profit and reduce outgoings.

Few business owners fully understand how profit is created, or how they can make themselves more profitable. They think being good at what they do is enough to create profit, it isn’t; profit is created by this AND by having good systems in place to monitor and improve performance. A poorly delivered product, or poorly performing Sales Team profit will be affected and ultimately the business will fail.

The beginning of any discussion about profit always seems to revolve around sales. The owner/manager asks, “How can I get more sales?” and “How can I improve sales?”

While the ‘more sales’ route to increased profits is obviously a clear starting point, it does fail to deal with what can only be described as ‘the mechanics’ of profit.

What is required is to step back and understand where the profits come from in your business. Only then can you start to see the impact of changes to different variables.

Understanding the impact of these variables on profit is the key. For instance, investigate the impact of increasing customers in comparison to that of reducing costs. Or the impact of trying to get more profit per unit by increasing prices. Clearly one will be more effective than the other; the key is determining which is the most effective for that product in your business.

Business Growth Tool

Rather than getting bogged down in the intricacies of how profit is created, let’s take this opportunity to discuss simple but powerful ways in which you can improve your profitability. Our business growth tool uses a number of fundamental actions to impact your sales and profitability. It interrogates your business processes, identifying actions you can carry out and how they would impact upon the business. The tool encourages you to sort profitability, ideally, in the following order:

1. Increase prices – this gives you more profit per sale
2. Decrease direct costs – this gives you more profit per sale
3. Remove under-performing suppliers/customers/staff and focus on your ‘best’ – this makes you more effective

Only then should you:-

1. Increase volumes – with a better business/financial model this now makes sense
2. Decrease overheads – this usually has the least impact on profits and damages morale so do it last.

Please note that when you do put prices up, the customers that leave are usually the difficult ones that buy on price alone – on the whole they are more effort than they are worth. This is a brave decision to take but consider this:

  • Increasing your price by 10% allows you to lose up to 25% of customers without any loss of profit
  • Decreasing your price by 10% requires you to make 50% more sales just to stand still

While a change in any one factor will impact on the profitability, the real power comes when you apply a combination of actions, which will give you a more powerful accumulative effect.

The Businness Growth Tool looks at five businesss variables. These are

  • Opportunities
  • Conversion
  • Frequency of sale
  • Average sale value
  • Gross margin.

Multiply theses five variables together to calculate revenue or gross margin. Apply an improvement and you will seee the effect, as in the example below.

This then becomes youur business strategy to double your revenue. The effect this has on your net profit will be compounded as your overhead should noot increase at the same level as the improvement. It is not unusual foor this strategy to increase your net profit by between 200% and 400%.

Another aapproach

The following activities will significantly increase your profitability without the outside world feeling that you’ve radically changed your businness.

  • Increase prices by 5%
  • Decrease direct costs by 5%
  • Remove under-performing clients/products/suppliers/staff
  • Focus on high–performing clients/products/suppliers/staff
  • Increase number of customer leads by 5%
  • Increase customer conversion rate by 5%
  • Increase numbber of purchases made by each customer by 3%
  • Decrease customer attrition rate (the speed at which they leave you) by 5%
  • Decrease overheads by 3%

Try applying the maths to your business and you will quickly see the potentially massive impact these relatively small changes can have on your business.

CONCLUSION

Your profit is inextricably linked to your sales and marketing efforts. The greater the number of potential customers you have, and the better you are at converting them, will determine your profitability. But first make sure your ‘business model’ stacks up. Ignore the impact of small but powerful changes at your peril.

Next week, we’ll look at cash flow.

Bob Evans, Freedom Coaching

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Comments»

1. jwojdylo - October 1, 2008

The great investors and entrepreneurs always prosper in the the times when everyone else is troubled. There are many opportunities in this current situation and I hope people are taking advantage of them!

http://jwojdylo.wordpress.com


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