Articles - Increasing Profits... a formula
The Formula to Increasing Profits
How does a business get more profitable?
What is the impact of increasing sales revenues in comparison to the impact of reducing costs?
If we step back and understand where the profits come from in your business, we can start to see the influence of certain activity changes on the overall profitability.
The ‘profit calculator’ uses a number of key activities that impact your sales and profitability. Essentially it is a list of tactics that influence profitability in the following descending order of impact:
- Raise the selling price
- Lower direct costs
- Sort the underperforming clients and focus on the successful clients
Only then should you:-
- Increase sales volume
- Lower overheads.
While a change in any one factor will impact the profitability, the real power comes when you apply a combination of measures which will give you a more powerful accumulative effect. For example, a 5% improvement on price, costs and sales volume has a huge impact on profits…
|
|
Current Situation |
5% Improvement |
|
Sales |
£500,000 |
£525,000 |
|
Direct Costs |
£400,000 |
£380,000 |
|
Overhead Costs |
£50,000 |
£47,500 |
|
Profit |
£50,000 |
£97,500!! |
Another tool that can be used is the ‘sales funnel calculator’.
At its simplest, this tool follows the journey that a potential customer takes before they generate revenue for your business. For instance, a pipeline or funnel that they may travel along goes as follows:-
- They visit your website or respond to direct mail / newsletter
- You have a sales meeting
- 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 each stage, the impact would be significant. For example:
|
|
Current situation |
Improve by 10% |
|
Leads |
1000 |
1100 |
|
Conversion rate |
50% |
55% |
|
Sales Meetings |
500 |
605 |
|
Conversion rate |
50% |
55% |
|
Proposals |
250 |
333 |
|
Conversion rate |
50% |
55% |
|
Successful Proposals |
125 |
183 (46%) |
Relatively small improvements in each of your activities have a great impact on the net result. In this example a few improvements of 10% lead to an improvement in successful proposals of 46%!
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.
In Summary
The following activities will significantly increase your profitability without the outside world feeling that you’ve radically changed your business:
- 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.
For practical advice on how to achieve the percentage increases, call me.
Mark Ace
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