So this week I want to tackle the flip side of that; how to get more profit out of your existing business.
The first port of call for most businesses is to increase sales, like that will instantly bring in more profit. But that certainly isn’t necessarily the case.
There’s hidden profit in most companies, and I’d always recommend that you tap into this before you start adding more problems to your business by adding new customers and overheads:
Where is the hidden profit? These are some of the areas you can look at:
- What gross margin do each of your products make? You have to know this so you know where you might be losing money. Do you have high margin products or services propping up the not so profitable ones?
- Your customers. Everyone has customers who lose them money, especially when you add in the cost of servicing them. Find out, and take action to either get rid or find ways to increase their margins.
- Can you increase gross margins by getting better prices from your suppliers or better delivery charges?
- Tighten up credit control if you have any bad debt. There are ways to combat bad debt through a combination of strong credit control and if needed, bad debt insurance.
- Efficiency. Of everything. How much are you paying out in overheads, staff costs? Could things be done better, quicker, cheaper? I don’t necessarily mean cutting jobs, but making the business leaner so you can take on more sales without having to scale up your overhead – create more capacity.
- If you have sales staff, are they all profitable? Do you know the profit that each one generate s over and above paying for themselves?
- If you have stock, do you know your stock turn and how much stock you lose through breakage, wastage?
- If you’re in a service industry, do you know your billable ratio and how much time you’re paying for that never gets sold?
So when you’re thinking about your plans for the next year or two, look under the bonnet first and see how you can increase your profits from your existing turnover. Not only does it make great financial sense, but you’ll keep your business slick as you grow which can only give you a fantastic competitive advantage!
I’m talking about Working Capital. It’s such a source of confusion for most people and yet a critical area of your business. I’ll be looking at what it means and how you can manage it practically in a small business.