Call: 01225 851 044
Directors' Centre Website

How To Increase Profit - An Introduction

The one question that small business-owners should be asking, but very rarely seem to ask directly of their business advisers, is how do I get more profit?

 

 

It never fails to surprise me that very few business-owners actually understand how profit is made, or rather how they can make themselves more profitable.

The beginning of any discussion about profit always seems to revolve around sales.  The owner-manager asks ‘how can I get more sales?’, ‘how can I get better sales?’, ‘how can I get more people to buy my product?’.

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

A long, cool look at how profit is derived forces us to examine the three major levers that will influence the profitability:-

• Costs
• Profits per unit
• Volumes

We know that these three are interlinked and changing any one will affect the other two.  While our accountants can sing the praises of calculating the relationship between cost-profit-volume, I question whether this is a valuable tool for owner-managers to increase profits.

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 parameters.  Let me explain:-

What is the impact of trying to get more customers in comparison to the impact of trying to reduce costs?  Clearly one is more effective than the other but we need to understand just how effective each might be.

Most businesses lurch from one crisis to another: profits are disappointing so they try to sell more; sales are great but product quality is slipping.  Product quality is fine but we are not making enough money… and the trick is to balance the needs of finance, marketing and operations so that we are getting results in all three areas.

Rather than get stuck in the detail of the intricacies of how profit is created, I will take this opportunity to discuss simple but powerful ways in which you can improve your profitability.  The ‘profit calculator ’ uses a number of fundamental actions to impact your sales and profitability.  It interrogates you to see which actions you can carry out and how they would impact upon the business.  The calcuator encourages you to sort profitability in the following order:

1. Increase prices
2. Decrease direct costs
3. Sort the underperformers/focus on the successful clients/products
   

Only then should you:-

4. Increase volumes
5. Decrease overheads.

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

The other tool that can be used at the same time as the ‘profit calculator' is the ‘pipeline calculator’.  This increase your volumes, but increasing volumes is a waste of time if each sale isn’t profitable enough… At its simplest, this tool follows the journey that a potential customer takes and examines the efficiency with which you are able to process them.  For instance, the pipeline or funnel that they travel along goes as follows:-

• They visit your website/conference stand/seminar and see you
• You have a conversation
• You offer a proposal
• They become a client

The effectiveness at each stage of this process impacts directly on your profitability.  If you are 10% better at attracting people to visit your website and then 10% better at explaining what you do and then you are 10% better at the way you presented your proposal, the impact would be significant.

	Current Situation			New Situation
Leads	1000	add	10%	1100
Conversion of Leads to Conversations	50%	add	10%	55%
Conversations	500			605
Conversion of Conversations to Proposals	50%	add	10%	55%
Number of Proposals	250			333
Proposal Success Rate	50%	add	10%	55%
Successful Proposals	125			183
				46%

 

As you can see from the example above, relatively small improvements in each of your activities has a great impact on the net result.  In this example a few improvements of a mere 10% lead to an improvement in successful proposals of 46%.

So, what are we asking you to do to have such a dramatic impact on your profit? 

• Is there a way you can get 10% more leads, see 10% more people?
• Is there a way you could be 10% better at the way you speak to people?  Go on a sales training course, find out how you can radically improve your business effectiveness by understanding how to talk to people in a way that will make them want to buy from you?
• Is there a way you could write better proposals?  A structured proposal format, focusing on the customer’s problems and how your solution is irresistible will improve your proposal hit rate.

Taking the same approach to each part of your business (breaking it down into its component parts) will get you to recognise how you can get large improvements in business performance, from relatively subtle changes.

Cutting to the Kill!

The following activities will significantly increase your profitability without the outside world feeling that you’ve radically changed your business.  So let’s go for it:-

• Increase prices by 3%
• Decrease direct costs by 3%
• Deal with underperforming clients/products – sack them
• Focus on high-performing clients/products
• Increase number of customer leads by 5%
• Increase customer conversion rate by 5%
• Increase number of purchases made by each customer by 3%
• Decrease customer attrition rate (the speed at which they leave you)
• Decrease overheads by 3%

 

Try applying the maths to your business and you will start to see the sheer size of the impact on a business of applying such slight changes.

Conclusion

Your profit is inextricably linked to your sales and marketing efforts.  The more customers that you see and the better you are able to get them to buy from you will determine your profitability.  You cannot grow a business without understanding how to market and sell your product.  You ignore the impact of these small but powerful changes at your peril.

 

About the Author

Robert Craven is working with Barclays as designer and author of the Spring 2006 seminars entitled ‘Let’s Talk Bright Marketing’ and ‘Let’s Talk More Profit’. These workshops are being delivered by Robert Craven of The Directors’ Centre.

He is author of business best-sellers ‘Kick-Start Your Business’ (foreword by Sir Richard Branson) and ‘Customer Is King’.  He wrote the award-winning USB (Understanding Small Business) Programme for Barclays.  He has recently been described as ‘one of the UK’s leading marketing specialists’ and the ‘entrepreneurship guru’.  He runs The Directors’ Centre, helping growing businesses to grow.

For further information, contact Tricia Yockney on 01225 851044.  (rc@directorscentre.com)

©2006 Robert Craven, The Directors' Centre Ltd.

publication details

First published at www.directorscentre.com, 2006.