How do I make 30% more profit

Most people want more profit and when asked, most people think they need more sales

But consider the following

Business A and Business B. They each have similar income, expense and profit.

Revenue             $100

Expense               $90

Profit                   $10

Goal                     Increase Profit 30% to $13

To attain the goal of increasing profit from $10 to $13 (30%) -

The owners of Business A decide that their strategy is to increase revenue from $100 to $125 (25%).

This is the default mentality of most business owners – increase “profit” by increasing “revenue.”

Business A achieves this by implementing strategies such as ramping up advertising, adding sales team members, rebuilding their website, designing new brochures, etc.

Business A

Revenue             $125

Expense               $112

Profit                   $13

The owners of Business B however take a different strategy. They decides to reduce expenses by 3.5% to $87

They take a long hard, critical look at all their expenses. They eliminate waste and improve the efficiency of their systems (and team members).

In doing so, Business B was able to increase its profits by 30% by reducing costs by 3.5%, without growing revenues.

Business B

Revenue             $100

Expense               $87

Profit                   $13

Let’s look at this another way.

With a profit margin of 10%, every dollar reduction in expenses equates to a $10 increase in revenue without having to find, close and deliver on extra sales.

This is leverage!

If your expenses are 90% of revenue, which they are for a lot of small businesses, if you eliminate 11% of your expenses your profits DOUBLE.

If your expenses are 85% of revenue, by reducing expenses by 10%, your profits increase by 57%.

We are yet to identify a business that operates at maximum capital efficiency – i.e. a business that cannot find at least a 10% reduction in expenses for the same revenue/output.

Another benefit of this strategy is that cost reduction can occur in a 30 to 60 day cycle. You can experience the benefits almost immediately; whereas strategies to grow your top line can take 6 to 12 months to provide a return.

________________________________________

Actions

1.              Print out your current Profit & Loss, Accounts Payable reports and your credit card statement.

2.              Calculate 10% of your Expense line items. This is your target saving.

3.              Go line by line through each statement. With a red pen, write “P” next to expenses that directly generate  (P)rofit; “R” next to any expense that while necessary, can be (R)eplaced with a less expensive alternate; or “U” next to any expense that is (U)necessary for delivering your product or service.

4.              Extract a staff list in excel, including annual wages. Filter staff by importance (most important at top).

5.              Tally all unnecessary expenses, including savings in wages. If you can save 50% of a wage – i.e. you don’t need a full time employee to complete the work, add that saving.

6.              Repeat until you have identified a minimum 10% saving.

Note: Cost cutting, particularly wages, can be difficult. Keep in mind that expenses are like a gas – they expand to consume the space they are in. Business expenses tend to expand to consume revenue. And you – as the business owner – is the one that suffers. It’s time to prioritise your profit and take control of your expenses.

If you need help. call Grrace Accountants, we can help you.