Improving your profit performance

If you’re reading this article after our first profit article and think about stopping – don’t. It really is way simpler than you think. 

Let’s take a look at ways to improve your profit performance. 

First of all, work out the Gross Profit and Gross Margin numbers for each of your product or service lines. This is done by working out the specific costs to produce and deliver that product or service over a specific period of time and subtracting these costs from the specific income these product lines generate. An example could be:

Table One

In this example, whilst the overall Gross Profit is £41,000 we can see that one product line is actually losing money and the business would be better off by £5,000 if they had not sold that product. There’s also 2 products performing well and the business would be better off selling more of them.

Then analyse fixed cost or overhead in conjunction with the numbers above. Maybe something like:

Table Two

In our fictitious example, the business is making £21,000 Operating Profit or 14% Operating Margin each month on a turnover of £154,000. If it hadn’t sold Product 1, turnover would have dropped to £130,000. But operating profit would have increased to £26,000 and operating margin to 20%. 

The other really great thing about focusing on profit is that everyone in the business can influence it, either from a cost or from an income perspective. The numbers above are modified, but the example is a real one. This was actually happening in one particular business. When we discovered it, the business owner had some options. 

  1. Close down Product 1  
  2. Reduce cost to serve Product 1 
  3. Increase the price of Product 1

They actually did both 2 and 3. But they started with 3. They increased the price by over 50%. The owner wasn’t sure it would stick but hey, if it didn’t they’d still be better off by not selling Product 1.

This is just one very simple example of how focusing on profitability can help and I hope it’s illustrated the point reasonably well. 

Some other areas to focus on to improve your profit performance might be :

  1. Identify & reduce leakage and wastage (e.g. get it right first time – no remakes / returns to site).
  2. Charge properly. This doesn’t mean overcharging your customer but it does mean avoiding discounting, charging properly for extras and additions and not allowing scope creep. Note – a 10% discount if you have a 25% gross margin requires you to sell 67% more volume just to stand still from a profit perspective.
  3. Identify and correct poorly performing products or services. Likewise, identify and sell more of your high profit product or service lines.
  4. Watch for chaos and confusion creeping in. Often, fast growing businesses take on more work than they are used to handling and profit margins evaporate quickly.
  5. Make sure everyone understands markup, margin and how you add value and then work to improve them.

 

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We work with business owners and MD’s to help gain clarity on their profitability and more. If you’re struggling with where to start, why not schedule a conversation with us? It’s free and at the very least you’ll come away with a couple of ideas to help you move forward.

Alternatively come along to one of our upcoming business masterclasses –  Upcoming Events