There are two fundamental ways to increase profits: cut costs and increase sales. Many small businesses find that reducing costs is the easiest way to increase profitability. However, the most effective way to increase profitability is to increase your turnover. That’s because there’s a finite limit on cutting costs, and there’s far more room for sales to grow.
You need to minimise your direct costs by negotiating lower prices with your suppliers, streamlining processes and systems to minimise waste. Increasing security to reduce the risk of theft can also reduce your costs.
Review your supply chain
It’s common for businesses to use the same supplier, year after year. You could save money by renegotiating these deals regularly, or even by keeping an eye on the market. Costs to review regularly include insurance, utilities, telephone and internet.
A great way to reduce indirect costs and overheads is to improve your systems. You could install better accounting software that offers you better, more regular reports. This could help you spot unnecessary overheads that you can eliminate.
The value of good systems
Good systems and processes help you minimise errors. Make it your mission to learn whatever you can from mistakes, and find ways to work smarter. Aim to review your system at least once a year to see where improvements can be made. Don’t forget to seek input from your staff as they’ll know your customers best. And make sure your systems and processes are still the best tools for the job.
Focusing on profitability can have a dramatic impact. The most commonly used key performance indicators are actual sales against forecasts, costs against budgets, gross margin and staff costs. Your accountant can help you ensure you’re monitoring the right indicators for your business.
Ask your senior staff to delegate their simpler tasks to more junior staff. This will free up their time to direct the business. It will also give your more junior staff more exciting jobs to work on.
Monitor the performance and productivity of your employees and reward those who are productive — maybe by linking their pay and other benefits to effectiveness. Remember to praise and thank staff when it's deserved, to keep motivation high.
Planning ahead lets you anticipate problems and be ready to adapt to changing circumstances. It also lets you set goals and measure your performance against them.
Set measurable, time-limited targets to monitor how effectively your plans are implemented, then review what you've achieved. This lets you learn from your experience and make continuous improvements.
Apply lessons business-wide
Make sure you set up systems that encourage best practice in your business. You could benchmark different parts of the business against each other to help identify and share best practice.
Never underestimate the importance of communicating with customers and suppliers. They can offer you tips and advice. Your customers are ideally placed to make you aware of any problems and can help you understand what you need to do to improve. Avoiding customer complaints is one of the worst things you can do. You’ll lose control of the problem and could find your unhappy customer taking to social media to seek retribution.
Here are some tactics to improve your turnover.
Try our Five ways to increase profit interactive lesson. It shows you how you can improve turnover with some small changes.
If you offer a number of products you can use a simple technique to improve overall profitability. This involves reviewing sales and profit margins, and dividing products into four categories:
Make sure you think about all aspects of your decision before you take any action. For example, a low-profit product could be a loss leader to attract customers.
It always pays to monitor your profit margins. When sales and turnover increase it’s normal to assume that you’re making more money. But you might find that your costs have increased by more than your sales, so you’ll be making less profit and not more.
Please note that this is a guide only and should neither replace competent advice, nor be taken, or relied upon, as financial or professional advice. Seek professional advice before making any decision that could affect your business.