increase your profitability

8/19/2019 Increase Your Profitability

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1. Overview

There are four key areas that can help drive profitability. These are reducing costs, increasing

turnover, increasing productivity, and increasing efficiency.

You can also expand into new market sectors, or develop new products or services.

This guide explains how to assess your business' profitability, deliver growth for your bottom

line, and how to plan and manage change.

2. Manage your costs

Close management of your costs can drive your profitability. Most businesses can find some

wastage to reduce, it's important not to cut costs at the expense of the uality of your products

and services.

!ave you looked at your key cost areas"

Your key cost areas to consider are#

Suppliers $ are you getting the best deal from suppliers" Can you negotiate better terms or do

you need to change supplier" Can you drive better deals by consolidating your supplier base"Can you buy on a '%ust in time' basis to make more effective use of your working capital"

Finance $ do you need to review your finance facilities" $ are they at the most competitive

terms available" &re you using any loans and overdrafts effectively"

remises $ have you examined whether you are getting the most out of your space" &re there

more efficient ways to use your premises" Could you sublet some unused space"

Production $ have you assessed whether you can cut waste and lower the costs of your

materials. Check whether you can adapt your production processes so they are more

streamlined, using fewer working hours or resources to cut labour costs.

(ncover real costs

(sing activity$based costing is an effective way to find the real cost of specific business

activities. &ctivity$based costing shows you how much it costs you to carry out a specific business function by attributing proportions of all your costs $ such as salaries, premises or

raw materials $ to specific activities.

The initial analysis may take a little time but using activity$based costing often shows up

costs )and therefore potential efficiencies* that you would not normally uncover using more

traditional costing methods.

3. Review your offer

+ook carefully at what you offer, who you sell it to and at what price and see if you can make

improvements.

ricing considerations#

t's a good idea to review your pricing regularly. Changes in your marketplace may mean that

you can raise your prices without risking sales. !owever, it's wise to test any price rises

before you make them permanent.

-ind your best customers#

t's not %ust your price list that affects your profitability $ the type of customers you're selling



to can also make a big difference.

Consider the areto principle )often known as the /01/ rule* and how it could apply to your

business. n simple terms, applying the areto principle suggests that around / per cent of

your profit is gained from 1/ per cent of your products or services. The same percentage of

profit is often also gained from the same percentage of customers.

-ocusing on your most profitable customers $ even if it means letting the less profitable ones

go $ could boost your profitability, so long as it is handled carefully.

Can you sell more to your best customers"

You may also be able to sell more to your most profitable customers. Consider the following

opportunities#

(p$selling $ selling them premium products that make a greater contribution to your profit.

Cross selling $ analy2ing what they buy and offering complementary products

diversifying $ identifying a need and developing new products and services to meet them.

4. Buy ore effectively

3ne of the most obvious routes to increasing your profitability is to buy more effectively. t

makes sense to review your supplier base regularly and see if you can buy the same raw

materials more cheaply or efficiently. !owever, try to ensure that you maintain uality at thesame time.

4et the best deal from your suppliers

dentifying your key areas of expenditure will show where you spend most money.

3nce you know where your money is going, shop around. Try bargaining with your

suppliers $ ask if you can have price reductions or discounts for early payment.

Consider using your status as a valued customer to agree long$term contracts or realistic

annual minimum spends with regular suppliers to obtain a better price. You could also

buy as part of a consortium with other similar businesses. f you can't strike a better deal,

consider switching to other suppliers.

5eview the number of suppliers you use. 6uying from too many can be inefficient $ it

takes up more time and dilutes your buying power. !owever, avoid placing all your

business with one or two suppliers $ it could leave you very vulnerable if things go

wrong.

Cut waste throughout the business

& review of common areas of waste could help you see how to reduce them, for example#

Can you cut your power costs, e.g. is all euipment turned off when it's not being used"

&re you getting the best deals from your power suppliers"

&re you paying for unused services e.g. unused phone lines or photocopiers"

Consider whether you're getting the best from your property. Your premises are a large

expense , so get the most from your investment or rental agreement#

Can you use your space more effectively by rearranging it" Could you sublet unused areas"

Could you negotiate a lower rental if you agree to a longer contract"

!. "oncentrate your sales efforts

There are two key strategies for boosting profitability through sales7 selling more to existing

profitable customers and finding similar customers to sell to.

8ork with your best customers

You should know who your best customers are, what they buy and when they buy it.

You can usually put your customers and the products or services they buy into one of four categories#



!igh sales and high profit

!igh sales and low profit

+ow sales and high profit

+ow sales and low profit

t makes sense to encourage customers that provide high sales and high profit. You can

also significantly boost your profitability by nurturing customers that provide high profit

on low sales.

f customers are providing low profit from high sales, you can maybe revise pricing to

generate more revenue from them. f customers are generating both low sales and low

profits, consider whether it's worth your while continuing to do business with them.

-ind new 'best' customers

Make a %udgment on expanding your customer base by finding new customers who have

a similar profile to your existing profitable customers.

f you are sure you have covered your existing market as much as you can, consider

moving into new markets.

My 6usiness app is for all businesses in 9cotland, whether you're established or thinking

about starting up.

#. $%pand your ar&et

Moving into new market areas can transform a business and, handled correctly, can

significantly increase your profitability. !owever, expanding into new markets can be risky $

and mistakes can prove very expensive.

:o your research#

6efore you start, carefully research the potential opportunity. Can you tailor or adapt existing

products or services for new markets" This can provide new revenue at minimal cost and is

ideal for boosting profit. -or example, if you manufacture tools for the garden market, are

there any potential applications for the tools in the construction industry"

:o you understand who your potential new customers are, why, when and how they will buy

the product or service and how much they will pay for it"

You can also use social media to do research and gain alternative insights, opinions and

feedback from your customers.

:eveloping new products and services

f you're developing a new product or service for a new market, it's good to carefully consider

its viability. ;ey uestions include#:o you have the skills and expertise in$house or will you have to buy them in"

!ave you got the commitment and resources available to make the new pro%ect work"

Can you minimise the risk"

Can you be sure there's a demand for the new product or service at a price you can make a

profit on"

Team up and reduce the risk

5ather than going it alone, partnerships and %oint ventures can provide you with increased

security in establishing yourself successfully in a new or expanded market.

'. Boost productivity

&ll businesses can minimise wastage costs and still remain competitive.

Measurement#



Measure your operational efficiency on an ongoing basis. ut systems and processes in place

that will enable you to get the most from your resources.

-or example, you could regularly monitor how many employee hours it takes to perform

specific tasks or provide services. f the time increases, it indicates inefficiency $ the uicker

you eliminate this, the more your profitability will benefit.

The commitment to managing productivity must come from the top to be successful.

Communicate your productivity targets and measurements so staff feel they have something

to aim at.

You can also consider introducing staff incentives to keep to targets $ but define them

carefully so uality is not adversely affected by increased speed of production.

:efining the key performance indicators );s* that are most suitable for your business

would give you clear targets to aim for. They should reflect your goals, be measurable and

comparable and allow for corrective action to keep your targets on track.

9treamline your processes

9tepping back on a regular basis and uestioning whether there are more efficient ways to

reach your goals is no bad thing. -or example, you may always produce a particular type of

product at a specific time in the month. 6ut would it ease your cashflow if you produced,shipped and invoiced it earlier, or later, in the month"

t's useful to get an idea about how comparable businesses approach similar issues. This is

known as benchmarking. 6enchmarking can be on a basic, like$for$like level $ such as

comparing energy costs between similar businesses $ or it can be more detailed, such as

sharing data and analysing production and stockholding patterns with other businesses you

trust.

The additional perspective that benchmarking offers can provide new ideas and momentum to

make your business more efficient.

8hen benchmarking, it is a good idea to focus on similar areas to the key performanceindicators );s* you have already identified. &lthough there are no standard templates you

can use to benchmark your business, you could take the following steps#

:eciding on the areas of your business that you want to improve or compare to others. You

could do this through research techniues, such as informal conversations with customers,

employees, or suppliers, focus groups, or marketing research, uantitative research, surveys

and uestionnaires.

5esearching your business' processes and functions thoroughly and calculate how you will

measure potential improvement.

-inding industries that have similar processes you want to introduce $ if you want to bring in

an integrated T system, you should find other businesses that currently use these types of

system.+ocate the businesses that are profitable in the industries you are interested in benchmarking $

you can do this by consulting customers, suppliers, or trade associations.

9urvey these companies for their measures and practices and identify business process

alternatives. f a business is reluctant to provide this information, you may get it through trade

associations or commercial market reports.

(. ")ec&list* iproving t)e profita+ility of your +usiness

mproving your business' profitability can help you to reduce costs, increase turnover and

productivity, and help you to plan for change and growth.

!ow you increase your business' profitability will depend on a number of factors $ such as the

business sector you work in, the si2e of your business, or its operating costs. !owever, you

could review these options#

+ocating areas in your business that could be improved or made more efficient $ e.g.



general business processes or administration.

(sing key performance indicators );s* to analyse your strengths and weaknesses $ e.g.

rising costs or falling sales.

&ssessing your general business costs $ e.g. overheads, how discounted deals with loyal

customers affect your profits, how productive your staff are.

5eviewing your areas of business waste and reduce them $ e.g. power supply costs

5egularly reviewing the pricing of your products.

Testing the prices of any products you review before making the changes permanent.

mproving your profitability through your best customers $ use up$selling, cross selling

and diversifying techniues to improve your profit margins.

dentifying areas of expenditure and limit these by bargaining with your suppliers.

+ong$term deals with suppliers to negotiate a better price on products.

5esearching new opportunities in your business sector and identifying where you could

expand the market.

ut monitoring systems and processes in place $ e.g. 6ench$marking.

increase your profitability

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