7 ways to increase your profits
7 ways to increase your profits
Are you aware of potential profit leaks in your company? Our own research among more than 500 SMEs shows that 9 out of 10 companies are leaking money. To assist you in optimising your profits, we will be sharing examples of profit leakage in the seven main areas, which you can implement to enhance your financial performance.
1: Price and margin policy
Are you aware of the exact cost price of your products and services? It has come to our attention that business owners are often not fully informed about the cost of an employee’s hour of work. While they may be aware of the selling price, or at least the amount invoiced for an hour of work, a more accurate understanding of the true cost can be surprisingly revealing.
One technical consulting firm charged a cost of £40 an hour. Recalculating the cost price resulted in a cost price of £55 per hour. The subsequent price increase from £50 in two steps to £75 to £90 per hour was easily absorbed!
When calculating your cost price, it is essential to consider not only the salary and additional personnel costs (direct costs), but also the number of billable hours. Overheads (e.g. premises, transport, administrative staff, management) are often overlooked, yet can amount to 30-50% of total costs.
Calculating the cost price often results in increased selling prices, highlighting the importance of asking the right questions. It also reinforces the need to be aware of potential anxiety about setting realistic prices due to past lean years.
2: Accounts receivable policy
If your business operates within the public sector or with other large organisations that have extended payment terms,
you may find yourself in a situation where you are aware that your invoice will be paid,
but the payment is delayed.
To mitigate this risk, it is advisable to agree to invoice in instalments, such as 30 per cent at the start of the work,
30 per cent upon approval of the concept and 40 per cent upon completion.
This approach ensures that your income lags your costs for a shorter period, thereby reducing the risk of high outstanding receivables.
Furthermore, it can enhance the working relationship with these clients.
3: Staffing
In times of labour shortage, there is a tendency to hire someone who somewhat fits the profile too quickly, without giving sufficient consideration to alternative options. One such option would be to hire a temporary, inexperienced worker (and therefore cheap) and pair them with an experienced worker.
Auf diese Weise erhöhen Sie die Kapazität der erfahrenen Kräfte und beschleunigen die Arbeitsabläufe. Dies führt wiederum zu zufriedenen Kunden, schnellerer Rechnungsstellung und besserer Rentabilität.
This way, you increase the capacity of the experienced force and realise an acceleration of work, which in turn leads to satisfied customers, faster invoicing and better profitability. Conversely, structurally hiring temporary workers puts (unnoticed) pressure on profits. These workers must be rehired repeatedly, and customers may find themselves dealing with a changing team.
4: Cost management
During the challenging years, significant progress has been made in terms of cost control, leading to a notable reduction in financial losses.
owever, it should be noted that cost control measures have, on occasion, resulted in instances of inefficiency, such as a costly team member dedicating two hours of their day to washing dishes.
The investment in technology that allows an expensive employee to focus on billable activities may increase costs initially, but it can ultimately lead to enhanced efficiency, increased staff turnover and enhanced profits.
5: Productivity
This is a significant area of concern with regard to profit leakage. Do you have oversight and control over all your employees’ billable hours and whether they are billed?
Do your employees spend an hour every day completing time sheets?
Do you have guidelines and procedures for optimising work?
Following an investigation into the billing practices of an ICT company, it was revealed that while the company charged a good hourly rate, employees were only billable for a maximum of 45 per cent.
urther investigation revealed that both the helpdesk and service teams were performing a variety of billable tasks that had not been reported to the sales department. Following a change in the way the company operated, the billing rate increased from 45 per cent to 85 per cent, leading to a significant increase in profits.
Conclusion: If you are unable to effectively measure your company’s productivity, it is possible to experience growth in sales without corresponding profit increases.
6: Inventory management
The company has a high inventory with a low turnover rate, which is the scenario to be avoided.
In trade and industry, inadequate stock management and insufficient stock control account for 7-8 per cent of total profit leakage.Small business owners may be tempted to offer a wide range of products to meet all customer demands, operating under the fear of losing a customer by not having the right product in stock.
Optimization approaches:
It is crucial to focus on high-margin products with a fast turnover rate, and to sell any products that have not been sold for a certain period of time.
This approach also optimises warehouse space.
It is also important to note that the use of overnight and on-site deliveries is becoming increasingly common,
and these services are not necessarily expensive.
7: Marketing & Sales
We hope that by now, your business is now operating efficiently. It appears that customers are attracted to your business naturally, without the need for marketing and sales activities.
However, it may be worthwhile considering which customers are most valuable, even if you regularly have to decline others.
The factors that may be contributing to this include the enjoyment derived from the work,
the favourable profit margin, or
the ability to combine it with other projects.
This approach enables businesses to focus on clients who can offer more of this sought-after work, while politely declining those who present less appealing or less profitable opportunities.
This strategy can result in increased satisfaction and profitability.
It is important to note that this is a marketing and sales strategy, but it can also be viewed as relationship management.
The areas of pricing, productivity and marketing and sales are the main profit leakage areas.
Our research indicates this, but what is more interesting is knowing how high the (potential) profit leakage is in your company, and not in percentages, but in hard pounds. For a first indication, you can take our Profit Leakage Quiz, which requires you to respond to a number of statements. If you would like to know more about the survey and its results, you can download the Profit Leakage Survey free of charge.
Interested in an introductory meeting to find out more about profit leakage?
Would you like to schedule a free, no-obligation consultation with a business mentor from thexton armstrong? If so, please contact one of our consultants in your area directly. You can also use our contact form.