So, you’d like to increase your profit margin and who wouldn’t?
Firstly, I’d recommend that you double check that you really know your numbers:
- What is your profit goal and please be realistic?
- What are your costs, both direct and indirect?
- What is your breakeven point?
- What are your current sales figures?
- What is your profit margin? (margin is a % of your selling price)
It is extremely important for all small business owners to know these numbers.
What is interesting is that because profit is the result of other variables you cannot directly get more of it but there are things that you can do to improve the variables that contribute to the profitability of your business.
Think of it as follows, if profit = revenue x margins and
revenue = no. of customers x no. of transactions x average price
then the simplest way to increase profit is to increase your average price and once you have reviewed all your numbers above, you will be able to determine a more accurate average price.
The next step is to look at ways of getting more leads and improving your conversion rate which together will result in more customers and finally you need to look at ways of improving the number of transactions that each customer makes. Improve these and you will improve your profit.
The following example highlights how a 10% increase in just one of the revenue elements can have a significant increase on profit:
If Customers x no. of transactions x average price =
e.g. 1000 x 2 x 100 = 200000 and
Revenue x margins = profit
e.g. 200000 x 25% = 50000
Just by increasing the number of customers by 10% (i.e. from 1000 to 1100) produces the following result:
1100 x 2 x 100 = 220000
220000 x 25% = 55000 i.e. an increase in profit of 5000
And just think of the impact if you were to increase more than one of the factors by 10%!
So begin by breaking your profit goal down into smaller pieces. Then, as with all goals, it becomes much more manageable and easier to achieve!
Here are just a couple of quick tips to help you get started.
Firstly, take another close look at your costs. Do they include your own wages/salary? If the answer is no (and I know for certain that this is the case for many small business owners) and your pricing structure is based on costs then straight away you are under charging which immediately has an impact on your profit.
Secondly, take a look at the timing of your purchases compared with your sales and when you are actually paid for those sales. This can have a big impact on your profit levels and the timings can actually distort the numbers. In your accounts, try and accrue for income from sales when you know there will be a time lag before receiving the actual payment. This will give you a more
accurate profit figure month on month. And don’t forget to allow for stock in hand and depreciation of any equipment as these can also affect both your pricing and your profit.
I hope this gets you re-thinking how to increase your profit. And always, I appreciate getting your comments – please just add them below.