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How to increase profit

Increasing profitability often depends on doing many small things, rather than making one big change. Discover how to increase your profit.

Easy ways to increase your profit

There are two fundamental ways to increase your profit: reduce costs or increase sales. For most small businesses, the easiest way to increase profitability is to reduce costs. Reducing costs can dramatically increase the profit you make on each sale; however, the best way to improve profitability is to increase your turnover – there's a finite limit on reducing your costs, and more room for sales growth.

Cutting costs

Identify the steps you can take to minimise your direct costs, such as by negotiating lower prices with your suppliers, reviewing processes and systems to minimise wastage, and implementing additional security to reduce the chance of theft.

Review your supply chain

Most businesses tend to stick to the same supplier, year after year, but you could save a considerable amount of money by renegotiating these deals on a regular basis, or at least keeping an eye on the market. Costs that could be regularly reviewed in your business include insurance, utilities, telephone and internet.

The best way to reduce indirect costs and overheads is to improve your systems. For example, installing better accounting software could provide you with better, more regular reports that compare your actual costs with budget figures, enabling you to spot unnecessary overhead costs that you can eliminate.

The value of good systems

Good systems and processes will help you minimise errors. Make it a policy to learn from mistakes and improve your systems as you find ways to work smarter. It's a good idea to review your systems at least once a year to see where improvements can be made. Don't forget to seek the input of staff as well to make sure your systems and processes are the best tools for the job.

Keep focused

Focusing management awareness on profitability can have a dramatic impact. The most commonly used key performance indicators are actual sales against forecasts, costs against budgets, gross margin and staff costs. Get help from your accountant to ensure you're monitoring the right indicators for your business because staff tend to work towards them whether they are critical for the business or not.

Your personnel

Encourage senior staff to delegate simple tasks to more junior staff who could do them just as well. This will free up time for senior staff to focus on directing the business.

Monitor and measure your employee performance and productivity and reward productive employees by linking pay and other benefits to effectiveness. It's important to praise and thank staff when it's due, to keep motivation high.

Plan ahead

Good planning helps you to anticipate problems and adapt as circumstances change, and allows you to set goals and measure performance.

Set measurable, time-limited targets to monitor how effectively your plans are implemented, then review what you've achieved so you can learn from your experience and make continuous improvements.

Apply lessons business-wide

Set up systems that encourage the communication of best practice in your small business. For example, benchmarking different parts of the business against each other can be a useful way of identifying and sharing best practice.

Also improve communications with your customers and suppliers – they can offer useful tips and advice. Your customers will be aware of any problems and can tell you what you need to improve. Avoiding customers you know have complaints may simply make matters worse and mean you lose the opportunity to improve your business.

Increasing your turnover

Below are some tactics to improve your turnover.

  • Look for new markets and distribution channels. Are you really making the best use of the internet? Can you form a strategic alliance with a complementary business or a joint venture to tackle work you don't have the in-house resources for?
  • Actively sell - don't just take orders. Businesses that are content to simply take orders are less likely to survive, let alone grow. Consider dedicating staff to investigating and implementing new strategies to increase sales.
  • Retain existing customers through good service and explain to your staff why the lifetime value of customers makes this effort worthwhile.
  • Review your credit limits if sales to a particular customer go up significantly and consider a credit check. If they are a stable and worthwhile customer, increase their limit or find out what else you can do for them.
  • Maximise the value of your sales. Consider moving upmarket and providing a premium product and service. Add features to products if the perceived value to the user will be greater than the cost to you.
  • Keep your product or service up-to-date. If appropriate, extend your product range or work to ensure it stays ahead of the competition.
  • Compare your price and quality with competing products or services. Aim to charge a full price and offer value for money from the extras you provide, such as after-sales service, installation and training or bundled extras.
  • Focus your efforts on your most profitable customers. Look after the customers who place large or frequent orders, pay the full price on time and are low maintenance.

Use the Five ways to increase profit interactive lesson to see the improvement in turnover that even small can make.

Review your profit margins

Businesses that offer a range of products can use a simple technique to improve overall profitability. This involves reviewing sales and profit margins periodically, and dividing products into four categories:

  1. High percentage of sales and high profit margins - nurture these stars
  2. High percentage of sales but low profit margins - consider a price increase and examine how you can cut costs to increase your profit margins
  3. Low percentage of sales but high profit margins - consider a sales push
  4. Low percentage of sales and low profit margins - eliminate these where possible

Take into account any possible effects before making decisions. For example, a low-profit product might be used as a loss leader to attract customers.

Profit tip

Always monitor your profit margins. If you see sales and turnover increasing, it's easy to assume that your business is making more money, but you might find that your costs have increased by more than your sales and that you are making less profit, not more.

Profit support

  • Look for ways to cut costs in your business. Ask your accountant or business adviser for input – they'll be able to identify any expenses that look high and provide areas you can focus on
  • Look for ways to increase sales and find out more about marketing support

To find out more about how we could help your business, contact us today.

This guide is intended as general advice only, and not intended to cover specific circumstances and needs. The information in this article is also not linked to any of the products offered by Clydesdale Bank PLC.

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