Why Improving your business profitability is important?
Growing your business model means your business is heading in the right direction, but does it really mean you are reaping high profits. High Turnover doesn’t necessarily mean your hard work is getting paid off. Profit and Wealth Improvement strategies provide you with comprehensive strategies that will help you with your business profitability.
Improving business profits has the following benefits:
Strategies to improve profit & Create Wealth
Once you have identified and measured your key profit drivers, you should develop strategies to grow them, without increasing costs. Making your business more profitable involves looking at ways to increase sales revenue as well as decreasing your costs and benchmarking your business to see where you can save money.
- Increase productivity of your staff - recognise and reward staff contributions with staff performance reviews, and teach them sales skills and how to upsell products so customers make multiple purchases at one time
- Develop new product lines - survey your customers about new products
- Find new customers - new customers can help grow your business
- Find new markets - use market research to determine if you could expand your business into new areas
- Customer service - improve your customer service and develop a staff training program
- Increase your prices - check if you have priced your goods and services correctlyand if you could increase prices without reducing sales
- Price discounts - consider price discounts and promotions to increase your customer base (e.g. 2-for-1 deals or happy hour)
- Retail displays - use effective retail displays to increase your sales
- Decrease inventory - stock control is a good way to streamline your business
- Decrease direct costs - make sure you have the right suppliers for your business and negotiate for better prices or discounts for buying in bulk
- Decrease indirect costs - for example, try to minimise waste and errors in your business by training staff, or reduce marketing costs by using low-cost marketingtechniques
- Decrease overheads - for example, save energy wherever possible or try find a cheaper energy supply company
- Benchmark key financials - benchmarking your business helps you compare your costs (like rent and utilities etc.) to similar businesses in your industry to see if you are paying too much
This hypothetical example shows you how you can use benchmarking information to:
- measure your performance against industry standards
- provide new ideas and innovation
- motivate you to introduce change into your business.
Bernard owns Cappuccino Craft, a coffee lounge and gallery in a busy street. He believes Cappuccino Craft could perform better, but so far he's simply followed the lead of the previous owner.
He sees that benchmarking could help Cappuccino Craft improve, so he:
- contacts his industry association to obtain information about industry benchmarks
- buys financial data from a commercial benchmarking business.
A profit driver is a business factor that has a significant impact on your bottom line. Bernard identifies his profit drivers as:
- cost of goods
- net profit
- trading hours
- display area.
Bernard investigates his benchmarking data and puts the key information about his profit drivers into a table so it's easier to understand.
(The percentages are of total income, except for those relating to 'Sales and display area %')
|Business 1||Business 2||Industry Average||Cappuccino Craft|
|Cost of goods||45.20%||46.90%||46.78%||53%|
|Trading hours per week||46||48||44||38|
|Sales and display area||90%||92%||87%||75%|
Identify areas of opportunity
Bernard sees that he is performing well in some areas (e.g. overheads) but there are areas where his business is underperforming:
- cost of goods
- trading hours
- display area.
Most of Bernard's benchmarking data is financial. He decides to gain more information about the opportunities for his business by:
- asking customers to complete a survey
- asking staff for their feedback.
Analyse causative factors
The factors that affect a profit driver in either a positive or negative way are called 'causative factors'.
Bernard investigates which factors are causing Cappuccino Craft to fall below the benchmark.
Cost of goods: reduce
Bernard speaks to his staff and realises that they throw out quite a lot of uneaten food each week.
Bernard also conducts a series of stocktakes. When talking with other business owners in the area he discovers that his stock losses are significantly greater than other stores.
- an unsophisticated ordering system leading to excess food wastage
- stock loss through theft.
Trading hours: extend
Bernard looks at the results of his customer survey. It shows a majority of his customers would like the coffee shop to open on weekends.
He also speaks to his staff. They tell him that they suggested to the previous owner that she increase trading hours.
- The previous owner played competition golf on the weekend and Bernard thinks that's why she didn't extend trading hours.
Display area: increase
Bernard speaks to his staff and discovers that the previous owner reduced the gallery display area to increase the office space.
Bernard has a home office and doesn't need a large office in the gallery.
- Bernard has made minimal changes to Cappuccino Craft, even though he does not need the large office that the previous owner did.
Address causative factors
Bernard is ready to make changes to the factors that are having a negative impact on his profit drivers. He plans to:
- install a security system, including cameras, and provide staff training on how to reduce shop theft
- implement a more efficient, 'just-in-time' ordering system to reduce the amount of food spoilage and waste
- open later in the day Monday to Friday and open on weekends, extending hours of operation to 50 hours a week
- remove the office extension to increase the gallery display space.
Bernard reviews his business plan and includes these changes, budgeting for the extra costs and projecting increased income from additional sales.
Benchmarking helped Bernard to improve the performance of his business.
Once you have chosen strategies to make your business more profitable, you should prioritise them in order of importance. It's a good idea to write down your goals and the corresponding strategies to achieve them, and also how you plan to implement your strategies.
Your products or services with the highest gross profit margin are the most important to your business, as they generate more money. Once you have identified your most profitable items you should concentrate on achieving higher sales targets for them. This may require you to rethink aspects of your business or to devise strategies for improvement. Consider using a business adviser to help you.
Planning and monitoring your cash flow is one of the most important things you can do when running your business. This should also include how you will address cash shortfalls or surpluses if they occur.
Forecast cash inflows against cash outflows
A cash flow statement will help you forecast your money coming in and going out. Forecasting your cash flow is usually done annually and broken down into monthly amounts. Always record the amount in the month it is expected to be spent or received. For example, electricity is usually paid quarterly so should be recorded in the month it is due.
You can use a cash flow template to forecast your annual cash flow. You will need to estimate and record the following amounts for each month:
- total monthly cash inflow - includes sales, sales of assets, capital injections from borrowings or owners funds, interest revenue and any other sources
- total monthly cash outflow - includes items such as purchases, loan payments, supplies, telephone, electricity, wages and any other bills
- net cash flow - take the total outflows from the total inflows to see if there is more money in or out
- opening balance - record your cash available at the beginning of the month
- closing balance - calculate your funds available at the end of the month by adding the net cash flow to the opening balance. This will become your opening balance for the next month. Note: If your net cash flow is negative, this amount will be reduced.
Include GST when inserting amounts for some cash inflows (particularly sales) and many cash outflows (particularly purchases). Calculate the difference between total GST inflows and total GST outflows and insert this as GST payments.
Different businesses are subject to differing GST requirements, so you should seek specific advice from your tax adviser.
Monitor actual inflows against outflows
As each month passes it is important to record your actual cash flow. This can be compared against your forecast to see if you are tracking as planned. You may find you need to review and adjust your forecast as amounts change over the year.
Always make sure your payments received match invoices issued, and receipts and payments match.
Invest surplus cash or arrange loans
If you forecast excess cash for some months, it can be worth putting it in short-term investments to maximise your income. If you anticipate any shortfalls in cash, you may want to plan for an appropriate loan to temporarily cover your costs. Don't forget to include these extra payments or receipts in your cash flow forecast.
There are a number of ways you can monitor the financial performance of your business using available data.
By using financial ratios you can assess where your business is underperforming, and judge the effects changes in one area will have elsewhere.
Monitoring figures closely will allow you to maximise efficiency and minimise waste, which will help your business in the long run.
This guide will help you understand how to assess the performance of your business by using common financial ratios. It will also help you to monitor profitability, cash flow and non-financial factors such as staff turnover and customer satisfaction.
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