Discover the DNA of profitability for your business
The Power of Small Change
Business owners often think they need to take dramatic steps to improve the profitability of their business. For example, many believe that if they want to double profits they need to double sales. Still others think they need to take on many more people, thus bringing with it many more headaches. This doesn’t have to be the case. The difference between the DNA of a chimpanzee and a human is only 2% - but what a difference that makes! 2% less and you’re spending the rest of your natural life learning how to crack open a nut; 2% more and you can fly a rocket to the moon! You may be surprised to find that the difference between a successful and an unsuccessful business is markedly similar.
So what is the DNA of profitability in a business?
Broadly speaking, there are five simple areas we can look at to improve business profitability. Let’s start to build up these areas one by one.
- Leads. This is any realistic, potential customer to your business - someone who might realistically buy from you. For example, someone who enquires about your product or service by visiting your premises, phoning, faxing, e-mailing or another contact method.
- Conversions. This is the percentage of leads who actually decide to buy from your business, committing their finances to your product or services.
- Average Pound Sale. This is the average amount of money a customer spends with you whenever they buy something from you.
- Transactions: This indicator is how many times in a recorded period (for example, a year) that a customer will purchase from you on average.
- Margins: It’s no use having a huge turnover and no profits. Therefore, this indicator is what net profit your business achieves on its turnover. This will, of course, vary considerably across businesses and industry sectors. The Average Pound Sale might be ￡100 in a clothes shop but it might be ￡25,000 in an car dealership. Most business owners are aware of these concepts but many can not tell you what these measurements are for their businesses. Simply measuring these elements on a consistent basis can increase the profits in a business and can astonish a business owner who has not before had a policy of measuring them
Having measured them, how can we get them working for our business?
Let’s take an example. Let’s say we own a clothes shop (just for simplicity, although this works for any business on the planet). Let’s say the starting figures are as follows:.
Where does the Power of Small Change Come in?
Let’s try to increase each of our numbered areas by 10% and see where that leaves us:
Now we know the 100% increase scenario might be a little far-fetched (although we actually once saw it achieved) but even the 10% scenario represents an increase in net profit of ￡36,930. Not bad by anyone’s standards.
- Calculate this for your own business.
- Do it now and see what it would deliver
- No - don’t wait…..!
Now you can see the potential here.
That’s all well and good, but my business is different!
Many business owners (normally those who can’t tell you what the above metrics are for their business) say that it would not work for their company, but in reality we have never seen a business where some form of this won’t work. It is always possible.
Here are a few key points to remember:
It doesn’t have to be expensive:
Some business owners believe that it all has to be very expensive; that you have to spend huge amounts on advertising to get more leads etc. This is not the case. Quite often we have seen businesses where spend has actually gone down. Their previous forms of advertising were simply ineffective and not tested and measured.
Test and Measure everything:
You cannot change what you haven’t measured. If you know the return on investment for any form of marketing you know whether it is worthwhile continuing or not.
Creative marketing:
Try to be creative about how you market your business. You can advertise, and if it works that’s fine, but sometimes businesses do nothing else. Look for other methods such as strategic alliances with other businesses.
There are literally hundreds of strategies to increase each of the areas listed above and some of them are bound to be of use to your business.
Believe:
This is probably the most important of the lot. Simply stop saying that it won’t work in your business and start testing it out for yourself. Consistently measure these areas and see what it does for your business.
Remember, Profit is not Cash Flow
It’s important to remember in all of this that profit is not cash flow. The majority of small business failures are actually a result of cash flow issues and not profit. There are many examples of small business that sold so much, so fast that they couldn’t pay their bills. This is primarily because they weren’t paid quickly enough by their customers but had to pay more to their suppliers to cover their increased sales.
To some this will sound obvious, to others it will come as a surprise. However, to us the only surprise is how many business owners actually don’t plan their cash flow.
Often they don’t have a basic cash flow forecast, let alone the ability to model potential changes in their businesses. For example, can you model the effect on your cash flow of?
- A change in your turnover (even a slight one)
- An increase in your prices
- A decrease in your prices
- A change in inventory levels
- Taking on a new salesperson or any new employee, or indeed letting one go
- A change in receivables or payables (how quickly you get paid by customers or pay your suppliers)
- Reducing your overheads
- Increasing your borrowings
Do you just carry out changes and assume/hope they will be beneficial? Do you just try to increase your sales and assume/hope this will be good for business?
Sadly, whilst increases in sales are normally good for business, surprisingly often they aren’t. It can cause a myriad of problems such as more work, increased overheads, cash flow problems, operational or production issues.
It’s always better to model the changes before you carry them out, to see what the impact will be on your business and, indeed, your life.
The unfortunate fact is that clichés are sometimes correct. Turnover is vanity, profit is sanity, and cash flow is reality.
Conclusion
The good news in all of this is that in order to dramatically improve the profits and cash flow in a business it sometimes only requires a few tweaks and not a major overhaul.
This is normally true in many other areas of the business, such as operational efficiencies, human resource issues, financial operations and indeed in time management issues as well.
It’s also easier to manage a large task such as dramatically improving a business by breaking it down into small tasks. If you want to start improving profits, begin by simply measuring where you are in each of the areas above.
Once you know this (and you’re careful about your cash flow), we can then talk about improving each of these areas (‘though we have an educated suspicion that the act of simply measuring them will lead to improvements in your business).
Don’t take our word for it – it’s your company! Do it yourself and see!
Contact me for a coffee and a chat over your own results.
Neil Niblock
ICON Business Advisor
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