How to help increase
your profit
Increasing profitability often depends on doing many small things better, rather than making
one change. There are really two main things you can do – increase sales and reduce
expenses. Discover how to balance these two options and increase your bottom line.
How to increase your profit
For most small businesses, the easiest way to increase
profitability is to reduce costs. Reducing direct costs
can dramatically increase the profit on each sale, and
eliminating unnecessary business overheads can have an
immediate pleasing impact on your bottom line.
The best way to improve profitability is to increase turnover
as there is no limit to sales but there is a limit on reducing
your costs.
Reducing your costs
Identify the steps you can take to minimise your direct
costs, such as negotiating lower prices with your suppliers,
reviewing processes and systems to minimise wastage,
and implementing additional security to reduce the chance
of theft.
For example, the owner of one manufacturing business
used the same supplier for 30 years, and never investigated
buying raw materials from anyone else. When the business
was sold, the new owner put all the main purchase
requirements out to tender. The result shaved 14% off the
company’s inventory costs or close to $100,000.
Most businesses tend to stick to the same supplier year
after year, so this is an area well worth exploring.
Costs that could be put out to tender in your business
include insurance, power, telephones and internet.
The value of good systems
Introducing systematic procedures and methods will help
reduce costs. Good systems will help you minimise errors,
and reduce time and money.
The time invested in creating systems is usually minimal
compared with that spent solving a problem from scratch.
Where appropriate, turn decisions into policies to avoid
having to make the same decision again or sort out the
same issues.
Learn from mistakes and problem areas, and if systems
go wrong, fix them. It’s a good idea to review your systems
periodically to see where improvements can be made.
A software company placed all of their information
centrally on their server, so that staff could access
information all the time, from anywhere. The owner found
each employee saved five hours a week, which could be
applied more productively.
Keep focused
Focusing management awareness on profitability can have
a dramatic impact. Even if cash flow is your top priority,
this should not be at the expense of profitability.
Make sure all your employees are aware of the importance
of profitability. 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.
Your team
Monitor and measure employee performance and
productivity, and reward productive employees by linking
pay to effectiveness. It’s important to praise and thank staff
when it’s due, and provide a clear career path so they can
grow and don’t see their prospects as limited.
Continuous improvement
A simple planning cycle greatly enhances your ability
to make continuous improvements. Good planning
also helps you to anticipate problems and adapt as
circumstances change.
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. Keep improving the
underlying systems and the planning process itself, but be
ready to alter your strategy if necessary.
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Apply lessons business-wide
Review your profit margins
Set up systems that encourage the communication of best
practice in your business. For instance, benchmarking
different parts of the business against each other can be
a useful way of sharing best practice.
Businesses that offer a menu 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:
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.
1. H
igh percentage of sales and high profit margins
– nurture these stars.
Increasing your turnover
Below are some possible tactics to improve your turnover:
• Invest resources in increasing your sales volume.
• Look for new markets and distribution channels.
For instance, 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 resources for on your own?
• Actively sell. Don’t just take orders. Businesses that are
content to simply take orders are less likely to survive,
let alone grow.
• Retain existing customers through good service and
explain to your staff why the lifetime value of customers
makes this effort worthwhile.
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. L ow 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 the one that brings other business from a major,
highly profitable customer.
For more information,
visit nab.com.au/smallbusiness
• Review your credit limits if sales to a particular customer
go up significantly and consider a credit check. If they are
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
is 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.
Please note that this is a guide only and should neither replace competent advice, nor be taken, or relied upon, as financial or professional advice.
Seek professional advice before making any decision that could affect your business.
©2010 National Australia Bank Limited ABN 12 004 044 937 78261A1210
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