Maximising your business profits

The primary purpose of a business is to make money. Generating revenue however is not a clear indicator of success. Profit is. And, profit is essential to the survival of the company.

Over and above that, profit is the lifeblood of a business. Profit provides the rewards if it’s taken out and the money for growth if it’s reinvested. It can also be a key reason why lenders are prepared to advance funds. And, if no alternative investors or funding are available, then profit is the sole source of business funding.

So, since it is so important, how do you maximise profit?

We’re keeping this simple so we’re going to talk about gross profit, which is defined as sales minus the cost of goods sold. To increase gross profit, you should look to increase sales income, while controlling or reducing direct costs.

Increasing income

Price

Increasing income can be as simple as raising prices. You should review your prices and put rates up regularly; that might mean annually or something different in your sector. When you raise prices it may cost you some customers, but it’s likely the increased revenue from those who stick with you will more than compensate for that.

A word of warning if you are considering dropping prices to boost sales: any increase in volume may prove insufficient to cover the reduced gross profit margin. Make sure you know your numbers before you take this kind of action.

Any decisions you take regarding pricing should be underpinned by:

• Your knowledge of your market and your competitors, so you appreciate exactly where you sit.
• Your confidence in the technical ability of you and your team, so you know you have everything covered.
• Your confidence in the quality and consistency of your product or service, so you know you can always deliver at a high standard.

Promotion

Whatever you do regarding price, visibility is key. To become customers, people need to know you exist and so you need to undertake some form of advertising or promotional activity.

Cost-effective ways to get the word out – and increase sales – include running promotions, leaflet drops, issuing press releases, being active on social media, and running adverts, including online advertising.

Referrals

Referrals are a great way of increasing business.

Consider setting up some sort of reward system whereby existing customers who refer you receive a gift of some sort when that referral becomes a paying customer.

Get paid

Finally, make sure you get paid, and on time! This sits across both camps – income and costs – as there is likely a cost attached to checking and chasing.

However, there’s no point in having loads of customers if they disregard your payment terms and drag their heels over payment – or worse, just don’t pay. Do your due diligence before extending credit and keep on top of credit control activity.

Chasing payment can be handled easily via cloud accounting systems. If you have to spend a little to save a lot, then that’s a sound investment.

Controlling and reducing costs

Know where the money goes

You need to be confident you know both where money goes when it leaves the business and that you aren’t overpaying for anything.

Review costs

A regular review – again, annually might suit you – is a good idea, more frequent checks however will mean you’re saving sooner. Things like energy, telephone, broadband and insurance costs benefit from this. Even bank charges can often be reduced.

Finance

If finance is required, make sure you get quotes from several sources; for example, your bank, a finance company and perhaps a specialist lender. If the funds are for an asset purchase you could add the supplier to that list and see what they have to offer, too.

Change supplier

You aren’t the only business trying to be competitive and it might be you can benefit from the efforts of a new entrant to the supplier market, for example. However, before changing supplier, consider the level of service you are currently receiving, as well as the cost.

Monitor expenses

Monitor business expenses and aim to keep them to a minimum.

Beware false economies

The caveat when it comes to reducing costs is you must be sure you aren’t making false economies. Cheapest isn’t always best; as with everything, do your due diligence.

Tax The biggest bill for many businesses is tax. You also have personal taxes to consider. Speak to a tax adviser to get an idea of how you can reduce your tax burden.

Information is the key

You must be aware of your income and expenditure. Up-to-date records, ideally live data from Xero, are essential for monitoring the trends and patterns in your business, and identifying ways you can maximise profit. It might not be necessary to produce a full profit and loss account every month, but rather you might select the key factors that will best help you understand how you are doing, such as chargeable hours, sales volume, wastage, and materials used. Compare these figures with previous months, and with your targets.

If you’re looking for some help to get to grips with your numbers, we have the tools and systems to analyse how money flows through your business and the expertise to help you develop strategies that will help you to maximise profit. Get in touch with the team to see how we can help you.

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