It’s important that your business sustains a level of profitability that meets your ambitions and allows you to invest as needed in its future growth and continued success. How can you ensure the sustained profitability of your business?
Here are four ways to do this.
1. Manage Your Costs
Close management of your costs can drive your profitability. Most businesses can find some wastage to reduce, but it’s important not to cut costs at the expense of the quality of your products and services.
Start by looking at your key cost areas, including:
- Suppliers – are you getting the best deal from your suppliers? Can you negotiate better terms or do you need to change supplier? Can you drive better deals by consolidating your supplier base? Can you buy on a ‘just in time’ basis to make more effective use of your working capital?
- Finance – do you need to review your finance facilities? Are they at the most competitive terms available? Are you using any loans and overdrafts effectively?
- Premises – have you looked at whether or not you are getting the most out of your space? Are there more efficient ways to use your premises? Could you sublet some unused space?
- Production – have you assessed whether you can cut waste and lower the costs of your materials. Check whether you can adapt your production processes so they are more streamlined, using fewer working hours or resources to cut labour costs.
Using activity-based costing is an effective way to find the real cost of specific business activities. This shows you how much it costs you to carry out a specific business function by attributing proportions of all your costs – such as salaries, premises or raw materials – to specific activities.
The initial analysis may take a little time but using activity-based costing often shows up costs (and therefore potential efficiencies) that you would not normally uncover using more traditional costing methods.
2. Review Your Offer
Look carefully at what you offer, who you sell it to and at what price and see if you can make improvements.
It’s a good idea to review your pricing regularly. Changes in your marketplace may mean that you can raise your prices without risking sales. However, it’s wise to test any price rises before you make them permanent.
It’s not just your price list that affects your profitability – the type of customers you’re selling to can also make a big difference. Consider the Pareto principle (often known as the 80/20 rule) and how it could apply to your business. In simple terms, applying the Pareto principle suggests that around 80% of your profit is gained from 20% of your products or services. The same percentage of profit is often also gained from the same percentage of customers.
Focusing on your most profitable customers – even if it means letting the less profitable ones go – could boost your profitability, so long as it is handled carefully.
Can you sell more to your best customers? You may also be able to sell more to your most profitable customers. Consider the following opportunities:
- Up-selling – selling them premium products that make a greater contribution to your profit
- Cross selling – analysing what they buy and offering complementary products
- Diversifying – identifying a need and developing new products and services to meet them.
3. Buy More Effectively
One of the most obvious routes to increasing your profitability is to buy more effectively. It makes sense to review your supplier base regularly and see if you can buy the same raw materials more cheaply or efficiently. However, try to ensure that you maintain quality at the same time.
Get the best deal from your suppliers by identifying your key areas of expenditure will show where you spend most money. Once you know where your money is going, shop around. Try bargaining with your suppliers – ask if you can have price reductions or discounts for early payment.
Consider using your status as a valued customer to agree long-term contracts or realistic annual minimum spends with regular suppliers to obtain a better price. You could also buy as part of a consortium with other similar businesses. If you can’t strike a better deal, consider switching to other suppliers.
Review the number of suppliers you use. Buying from too many can be inefficient – it takes up more time and dilutes your buying power. However, avoid placing all your business with one or two suppliers – it could leave you very vulnerable if things go wrong.
Cut waste throughout your business. A review of common areas of waste could help you see how to reduce them, for example:
- Can you cut your power costs, e.g. is all equipment turned off when it’s not being used?
- Are you getting the best deals from your power suppliers?
- Are you paying for unused services e.g. unused phone lines or photocopiers?
4. Concentrate Your Sales Efforts
There are two key strategies for boosting profitability through sales – selling more to existing profitable customers and finding similar customers to sell to.
Work with your best customers. You should know who your best customers are, what they buy and when they buy it. You can usually put your customers and the products or services they buy into one of four categories:
- high sales and high profit
- high sales and low profit
- low sales and high profit
- low sales and low profit.
It makes sense to encourage customers that provide high sales and high profit. You can also significantly boost your profitability by nurturing customers that provide high profit on low sales.
If customers are providing low profit from high sales, you can maybe revise pricing to generate more revenue from them. If customers are generating both low sales and low profits, consider whether it’s worth your while continuing to do business with them.
Find new ‘best’ customers. Make a judgement on expanding your customer base by finding new customers who have a similar profile to your existing profitable customers. If you are sure you have covered your existing market as much as you can, consider moving into new markets. This can transform a business and, handled correctly, can significantly increase your profitability. However, expanding into new markets can be risky – and mistakes can prove very expensive.
Do your research. Before you start, carefully research the potential opportunity. Can you tailor or adapt existing products or services for new markets? This can provide new revenue at minimal cost and is ideal for boosting profit. For example, if you manufacture tools for the garden market, are there any potential applications for the tools in the construction industry?
Do you understand who your potential new customers are, why, when and how they will buy the product or service and how much they will pay for it?
You can also use social media to do research and gain alternative insights, opinions and feedback from your customers.
The Profitability Checklist
Improving your business’ profitability can help you to reduce costs, increase turnover and productivity, and help you to plan for change and growth.
How you increase your business’ profitability will depend on a number of factors, such as the business sector you work in, the size of your business, or its operating costs. However, you could review these options:
- locating areas in your business that could be improved or made more efficient – e.g. general business processes or administration
- using key performance indicators (KPIs) to analyse your strengths and weaknesses – e.g. rising costs or falling sales
- assessing your general business costs – e.g. overheads, how discounted deals with loyal customers affect your profits, how productive your staff are
- reviewing your areas of business waste and reduce them – e.g. power supply costs
- regularly reviewing the pricing of your products
- testing the prices of any products you review before making the changes permanent
- improving your profitability through your best customers – use up-selling, cross selling and diversifying techniques to improve your profit margins
- identifying areas of expenditure and limit these by bargaining with your suppliers
- long-term deals with suppliers to negotiate a better price on products
- researching new opportunities in your business sector and identifying where you could expand the market
- put monitoring systems and processes in place – e.g. benchmarking
If you need help with working out the best way to improve profitability in your business, do get in touch with us. Call Jonathan Lane on 07503 891 331 orPippa Hutchinson on 07941 819 169, or click here to email us.