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.
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.
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.
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.
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.
Below are some tactics to improve your turnover.
Use the Five ways to increase profit interactive lesson to see the improvement in turnover that even small can make.
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:
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.
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.
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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.