In recent columns, I’ve highlighted key components from the “Five ways to grow Profits” — a formula-based concept I use with all my coaching clients.
This week, I’ll discuss the last of the five ways, simple strategies any business can use to boost profit margins.
Despite the obvious advantages, most business owners spend far too little time analyzing the data or implementing ways to improve their profit margins.
Begin by recording and tracking your actual costs. Then take the necessary time to research and evaluate ways of reducing them.
All costs, from wages to stationery, should be factored and calculated as a percentage of sales.
Be sure to communicate these figures to team members. They need to know what it costs to do business, and they can also suggest creative ways to manage these expenses.
Audit all areas, and then decrease costs even one per cent. Within three months you’ll have reduced costs significantly.
Evaluate your suppliers to determine new sources. Always consider getting quotes on different products and services that could save substantial dollars — you can always ask existing suppliers to match figures.
Join or start a “buying group.” This type of group partners like companies that purchase similar products from manufactures that offer bulk prices.
A small company can’t buy a large enough volume to get these lower prices. Your combined purchasing power should enable you to get a better price.
Know the exact margins on everything you sell and do. If you work in the service industry, know which services offer the most value and achieves the largest revenues for the least amount of input and effort.
Higher quality items/services command a higher price point, and often a higher margin. Perhaps you are in a business that can buy in bulk and repackage using your own company label. This option must be researched fully, as different packaging is very expensive.
Next, re-frame your existing price margins.
Obviously, the fastest way to jump-start profitability is by raising prices. As I’ve stated before, most business owners are more cautious about increasing prices than their customers perceive. If you’re not prepared to increase prices across the board, apply slight increases to products or services that are the slow sellers, and then increase your top sellers.
Over time, companies lose pricing discipline and discounts are applied inconsistently. Discounting not only costs you money, but it gives the impression that your normal prices are too high. Customers may also hold off purchasing, thinking a $100 item today may be $80 tomorrow.
Stop discounting and offer more added value to products and services.
Your team can help boost your margins, particularly if you make it worth their effort. Offer incentives to pay additional commissions on full price or added value sales.
One of the bigger burdens on any business is that of staff costs. Negotiate overtime with your team members. Many times they would much prefer to work flex-time or even take additional time off. They also avoid a higher tax bracket.
Your company may even benefit from employing sales people on commission only. You eliminate added staff costs plus pay for performance only. In some cases, outsourcing the job is the most cost-effective option.
A critical consideration is to lower the overall cash tied up in stock and inventory. This has an adverse effect on cash flow and you run the risk of being stuck with it if trends change.
Always keep inventory as low as possible, and only re-order stock as it’s needed.
Change your accounts receivable dates. Reduce from 30 to 15 days. Depending on your type of business, take deposits. “Cash flow is king.” Remember the money is always better off in your own account.
Lastly, keep up-to-date records. Outdated or incorrect information in your database costs your business money.
An active database can also be used to offer online offers and product specials. Marketing through your email contacts and an active website is fast becoming a cost-effective method, reducing traditional sales expenses.
Small improvements, even five per cent, can translate into profit increases equivalent to a 30 per cent rise in sales.
As with most strategies, some will be more applicable to your business than others. Eliminate those that don’t suit you, but select a minimum of three to incorporate into your business to instantly boost your profit margins.
ActionCoach is published on the second and fourth Tuesday of every month in the Business section of the Advocate. It is written by John MacKenzie, whose Red Deer business ActionCoach helps small- to medium-sized organizations in areas like succession planning, systems development, sales and marketing, and building/retaining quality teams. MacKenzie can be contacted by email at johnmackenzie@actioncoach.com or by phone at 403-340-0880.