As business advisors, one of the things we are passionate about is encouraging business owners to engage with their numbers.
This year we will be running more seminars along this theme to show owners how to drive more growth and profit in their business by using their numbers.
A great example of this is a little exercise we run with clients to demonstrate the power of small improvements in their numbers.
The scenario looks at a business owner who isn’t happy with their current level of profit. They would like to achieve a net profit of 15% after taking home a reasonable salary for their industry. The business currently operates at a 35% Gross Profit Margin and a 10% Net Profit Margin.
Gross profit being revenue less direct cost of sales and net profit being gross profit less overhead expenses.
A few options the business owner has to reach their goal include:
- Increasing the volume of sales
- Discounting to increase the volume of sales
- Increasing prices
- Reducing cost of sales
- Reducing overheads
So the business owner goes ahead and tests the impact of increasing their sales volumes by 25%. This achieves a fantastic outcome of a 70% increase in profit, however it isn’t easy to achieve volume increases of this size.
They next test discounting prices by 10% and the owner is shocked to see that it wipes out their profit altogether. In fact, for a business operating on a 35% gross profit margin they would need to increase their sales volumes by 40% to maintain their original profit position. Not ideal!
When they test increasing prices by 10%, the profit in their particular circumstances actually doubles. Again, the owner is surprised at the size of this improvement given it would take very little effort on their part to implement.
A 10% reduction in cost of sales leads to a 65% increase in profit which is another great result.
The final thing they test is reducing overheads by 10%, which results in a 10% increase in profit. This doesn’t have as much impact as the other measures but still delivers a good result by trimming some fat from the business.
So overall, increasing prices had the biggest impact by far and is the easiest to implement. Of course, you need to be careful when increasing prices and you need to be aware of how you compare to your competitors. If you are providing a great product or service, know your competitors charge the same or more and are only increasing prices in small increments, then the increase will likely meet little resistance.
For the best outcome, you can look to make a number of small changes together. This way the results will be magnified. In our previous scenario, if the business owner increases prices by 5%, reduces cost of sales by 5%, reduces overheads by 5% and increases the volume of sales by 5%, their profit would increase by a whopping 191%.
Imagine the impact that would have on your own business!
So why not put aside some time to apply this to your own circumstances. Once you start engaging with your numbers, it can only have a positive impact.
If you’re not sure how to run this type of review on your own business, reach out to the Tactica Team who can help you pump up your profits.