increase your profitability
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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
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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#
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!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#
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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. <hough 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.
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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.