How to Increase Profits

There are just three ways to improve your profits:

• Increase margins
• Increase sales
• Reduce overheads

 

A. Increase your Profit Margin

This is usually the best and easiest way to increase your profitability. The margin is the gross profit (sales less direct costs) divided by the sales value, excluding VAT. If your sales are £500,000 and you improve your margin from 45% to 46% your profit will be £5,000 higher.

Examine every part of the margin to see what can be improved, such as cutting out loss making sales, increasing sales to profitable customers etc. Examine it like a hawk as soon as it’s known each month – why has it changed? Benchmark against comparable businesses in your sector – how well are you doing, should you be improving?

 

Increase Prices

If sales are a struggle, many businesses think the best thing to do is trade their way out of the problem by reducing prices to win more sales. Whereas in many cases this is the worst thing to do, as it often has a negative effect on profits.

Take the following scenario. For a product selling for £10 with a gross margin of 25%, reducing your price by 10% to £9 means you have to sell 66% more to make the same profit as before,  yet increasing your price by 10% or £1 to £11 means you can afford to sell almost 30% less units and still make as much profit. The route to increased profits can often be through price increases, rather than price reductions.

Sale Units	Sale Each	Cost Each	Gross Profit Each	Gross Profit Total
100	£10	£7.50	£2.50	£250
166	£9	£7.50	£1.50	£249
70	£11	£7.50	£3.50	£245

 

Price Inflation

If you’re providing a good service or product, normally you should be able to increase your prices every year by inflation or 3%. If may feel difficult but you should do it unless you’re absolutely sure it won’t wash. Assume it will rather than it won’t. People buy quality and service – your price may not be the most important factor.

 

Identify Profitable or Unprofitable Clients, Sectors, Products and Services

Think about whether or not what you are selling provides you with the best profit. If you are selling generic or third-party branded products in a crowded marketplace, competition may be cut-throat. You might find that it is more profitable to branch out into niche offerings where there is less competition, or even move into a completely different business sector.

 

Decrease Direct Costs

Go through everything and look for improvements.

 

Improve Production Efficiency

Audit the whole process from procurement through to sales to check that everything is being done in the best way possible.

 

B. Increase Sales

This tends to be the most obvious. It’s easy to increase sales by reducing prices but be careful as that could result in an actual reduction of profits – see above.

Consider diversifying lines, carefully cutting prices on slow-selling lines to make them more competitive and clear the stock, or enhancing your marketing reach.

Maybe just work harder and smarter at selling more - check social media, e-shots, website etc..

 

C. Reduce Overheads

• Review all your significant costs at least every three years or more often - such as rent, fuel bills, wages, insurance and transport costs. While it is useful to strike up solid business relationships with reliable suppliers, if you shop around you might find that you can significantly cut costs by changing whilst maintaining the same level of quality service
• Are you paying too much for premises in an unnecessarily central or otherwise expensive location? Indeed do you need an office at all? Maybe some or all of your business could be online, working from home?

 

Reduce Debtors

Check what typical debtor days are for your industry. Debtor days are calculated as days worth of sales.

For example: debtors at end April £250k, sales in April £150k, sales in March £120k. Debtor days is 30 from April and (250-150)/120 x 31 from March, a total of 55.8 days.

Where you can improve, most businesses can, then you will reduce your level of bad debts, hence increasing your profitability. Of course you’ll also improve your cash position.

 

Reduce staffing costs

Always be on the lookout for easy and quicker ways of achieving the objective. Think of new methods – just because it’s always been done a particular way doesn’t mean it can’t be changed.

An example is accounting software which nowadays can save huge amounts of time by automating laborious tasks.

Consider redeploying resources, even losing some staff where you can.

 

Reduce Stock

Holding excess stock not only costs money but it also ties up cash which could be better used elsewhere.