How to boost profits
WITH the new financial year just weeks away, entrepreneurs across the country are busy putting together budgets, business plans and growth strategies for 2010-11.
And after a difficult few years, many will be
hoping for a big boost to the bottom line.
There are countless ways for business owners to boost profits. Raising prices and cutting costs provide a great starting point, but entrepreneurs need to think more broadly about strategies for winning more business and lifting sales.
To help, we've assembled 20 tips from entrepreneurs and experts that will get you thinking about ways to grow your business and your profits.
Align your sales team with profit
Bevan Slattery, chief executive of PIPE Networks, says businesses often incentivise their sales teams to go after the biggest deals in terms of revenue. Instead, smaller businesses need to focus on having their sales teams deliver deals that are rich in profit.
“The usual trap I see businesses falling into is that they often chase revenue, and forget profit. In our organisation, we are very profit-focused, to the point we don’t pay our sales people for the total revenue of a contract, we pay them based on long-term recurring revenue they provide.”
We align staff interests with company interests. The kind of revenue we’re talking from these deals could be over eight years.”
Slattery says he believes competitors become excited over revenue-heavy deals, but he shuns these contracts in favour of more profitable ventures.
“Our sales people originally just wanted to chase any business, but rather we said, let’s just keep to the products we know and then we’re going to have a price advantage over our competitors. I’d rather have a smaller deal with a bigger profit.”
Rod Young, executive director of DC Strategy, says if your sales people aren’t producing profit then you need to consider replacing them.
“Look at your people, and the poorest performers should probably be replaced. I would encourage people to see their employees and team members as a resource, not a cost.”
Get paid upfront
Sales expert and SmartCompany blogger Trent Leyshan of Boom argues many businesses structure their payment terms in a way that reduces not only cashflow but also profit.
“They have valuable money and resources invested in projects or stock ― and then their customers drag their feet and pay months after their product or service has been delivered.”
He advocates what he calls “positive” cashflow – getting paid upfront.
“In my own business, my fees are paid upfront and in full. This provides my business with not only ‘positive cash’, but also the leverage to deliver my value at the highest level. I’m not cutting corners because I have to, nor am I worried about paying my accounts person to chase payments for months after the fact. This allows my business to grow and move from one client to the next seamlessly.”
Leyshan admits that the theory won’t work for all business, and says customers will need to be convinced that the payment structure delivers them real benefits.
“If ‘positive cash’ is too hard to achieve, I recommend your senior leaders and even sales team members collaborate and brainstorm ways you can add more ‘tangible value’ into the front end of your offer, with payment terms being weighted accordingly.”
Make pricing a priority
SmartCompany blogger Julia Bickerstaff, who advises businesses through her companies Butterfly Coaching and The Business Bakery, says too many businesses take an ad hoc approach to pricing and need to take this process seriously.
“Put a formal pricing review in the diary for each year. This may mean scheduling a regular price increase once or twice a year for service businesses, or at least performing - once or twice a year - a review of your pricing strategy.”
“Pricing makes the quickest impact on profit, and a small percentage increase at the top line can mean a big percentage increase at the bottom.”
Stop your advertising
Rod Young says businesses often have no clue what return on advertising they are getting and need to pay more attention if they want to cut costs and boost profits.
“Half of your advertising is not working, and most people don’t know which half. They throw all this money around and they are not measuring and testing how that advertising dollar is turning up in terms of profit.”
“You need to specifically measure your ROI, how many customers are coming from a particular source and what the cost per customer is. Only when you do that can you determine how large your profits can become.”
Integrate your data
Craig Reardon of technology consultancy firm The E Team has a simple question for SMEs: how many places do you store client contact details in?
“Chances are it’s several. And every time you need to alter a detail it ruins your productivity.”
Reardon argues integration of web and IT systems is critical to increasing productivity, reducing duplication and minimising errors – which will have a direct impact on profit through reduced costs.
“Look for systems that can integrate client and other data requirements seamlessly.”
Lean on local support
Rod Young says working with other businesses and groups in the area can deliver some solid benefits.
“The importance of local area marketing when it comes to profits can’t be underestimated. This is all about doing business with other businesses, local sporting clubs and groups, and building relationships. This is absolutely imperative to building profits.”
“You want to take part in local area marketing to bring people back. If you sponsor a sporting club, and give out an award for best and fairest player, or whatever, you’ll get that kid coming into your store. But next time they’ll bring their parents, and two friends, and so on.”
Young says businesses could also take part in a type of reward system with other businesses, but he warns that loyalty-cards often degrade value for SMEs and could even cost them revenue.
Make your website scalable
Craig Reardon says that providing a professional website is no longer enough for an SME - it's the underlying website platform that holds the real value by allowing you to add and edit new content, create marketing campaigns, run forms and surveys and sell online.
“When considering what website platform you will use, remember that it must be completely scalable, that is it is able to 'bolt on' new functionality and design elements easily and affordably and without having to reinvent the wheel.”
“This capability will save you thousands of dollars in both real dollars and productivity over time.”
Pay often, pay early
Having and maintaining solid cashflow is the key to turning a profit, but Oxford Funding chief executive Rob Lamers says you can work with suppliers to make that cashflow work to your advantage.
“If you have good cashflow, that in itself isn’t enough. You should be going to suppliers and negotiating a discount if you pay earlier. You can save up to 5% by paying a week earlier sometimes.”
“If you have positive cashflow you can buy more stock, generate profit, and pay suppliers earlier and get a discount on that stock. It allows you to take advantage of opportunities you didn’t have before.”
Monetise spare capacity
Being able to sell more products is easier said than done, but these experts say it isn’t necessarily as difficult as you may think.
Retail expert Phil Bonanno says making use of unused stock is something a lot of businesses overlook, as obvious as though it may seem.
“Many companies have gone lean and mean on expense and will probably find it difficult to cut expenses more without degrading their offer/experience to their customers.”
Bonanno says businesses can increase sales by creating new product categories, creating limited-time-only sales, making it easier to actually buy the product and by making themselves “experts” in their field.
Bevan Slattery says businesses need to be able to increase the volume of what they are selling but still keep prices high – and they can do this by budgeting for extra capacity.
“When we first build infrastructure, we made sure we budgeted around having spare capacity. We obtained ownership of that capacity, and we were able to offer clients some services on that. Businesses need to be able to monetise that spare capacity they aren’t using – that is how they will increase profit.”
Change your personal focus
Export expert lawyer Lynda Slavinskis has a simple tip that many entrepreneurs would understand, but may not know how to put it into action.
“My tip is to delegate those functions which are systems driven and can be done by someone else, like your administrative staff.”
“These are normally the jobs that take up a lot of time but don’t bring in a lot of revenue, freeing you up for working on your business, marketing and getting in more work.”
And if you’re something of a control freak who just can’t let go of a certain process or task, Slavinskis says you can retain control by generating detailed checklists for those jobs you delegate.
“That way you can ensure a good level of quality control.”
Focus on superior service
Rod Young says businesses are justified in charging a high price for products, but they need to be able to offer an appropriate level of service.
“I think there are a number of key drivers in terms of profit. The first is pricing. Many underprice because they think that price is the only differentiator, and as a result they are afraid to charge for their product or service because they are worried about the competition. I think the first thing businesses need to know is that they should be proud to charge a price the service commands.”
“Myer doesn’t have the cheapest prices, but there is a trust factor involved. The service experience and relationship increases price, and commands higher prices, and so the message is to simply have a price that your service commands.”
Slattery agrees, saying customers needs to see the value in your product before you can even think about lifting prices.
“If you can actually demonstrate you are giving more value than your competitors, then yes you can increase prices, but you need to be very careful about that. People can increase prices without warning, but customers only wear that for a small amount of time.”
Network your way to profit
SmartCompany blogger and real estate industry figure Kirsty Dunphy says that in her sector, the easiest business to get is from people who already know your reputation and trust your brand. If you want to drive more profit, you need to win more of this type of business.
“If more than 50 per cent of your new business at the moment isn't repeat and referral this is absolutely something you can work on building up if you make a concerted effort,” she says.
“Consider joining a service group like Rotary or a networking group like BNI or Accelerate Women. Develop a database of your nearest and dearest and find a way to make sure they know about your industry. Survey your current clients and ask if they would feel comfortable referring you to friends and family.
“In fact, simply surveying your current clients and making sure they're happy and asking the question "what can we improve?" would be a great start for lots of businesses, remembering that it's much easier to keep and expand on existing business than it is to create new leads.”
Go open source
Guy King, co-founder of Stateless Systems, says businesses can improve profits from day one if they simply use non-traditional technology.
“As far as keeping costs down, I think a big clue is that just because everyone has done something traditionally it doesn't mean that you need to be doing it too. We see small businesses spending a fortune setting up exchange servers, hosting services, and so on.”
“Instead, we use Google Docs, outsource our hosting and use Gmail – really, it's a no brainer for us. It frees up our energy doing what we are good at which helps us get money. Why go out and buy Quicken when everyone else has, when you could get a good hosted software effort on the internet for free? Costs you a fraction of the price – it's these little things that add up that you can get rid of.”
Young says businesses can use that extra cash to put towards profits.
“These little things are so minor, but they add up. Stationery is a huge component, behind wages and rent, so you need to figure out which of these costs can be eliminated, either through using computers, or something else.”
Study the competition’s profit margins
Markwell says while increasing margins and profits can be done in a number of different ways, keeping an eye on the competition is one tip businesses often overlook.
“Of course, margins are the key to profits. But a lot of people who set their margins don’t even look at their competitors. A proper review will involve looking at those businesses and seeing where they are.”
“Only by looking at those competitors can you actually get a feel of what they’re doing, and you might find you’re drastically underpriced or you may be in a unique position, or whatever. You need to change your pricing structure to capitalise on that.”
Systemise your way to profit
David Markus, founder and managing director of IT consultancy Combo, has spent the last 12 months increasing his firm’s focus on the main piece advice he always gives to clients – put robust systems in place to keep your business running reliably and smoothly.
“We have boosted our profit over the past 12 months by over 100%. The way we have done this is by ensuring our systems take mundane rhythmical tasks and either automate them or remind staff to do them so they happen reliably.”
Systems Markus has implemented or improved range from systems for monitoring PCs and servers, time sheet management, scheduling of service staff, call logging and problem resolution databases.
“One of the mindsets we have adopted with each problem we solve for a client is that by completing a job we can create a digital asset that will save us time in the future.”
Combo has also introduced HR systems for managing the company’s big objectives down to an individual level, and rolling the results of regular staff reviews up into a company health index.
“So if you have a business that involves repeatable processes or multiple staff, start looking for ways to pull together rhythmical and mundane tasks and making them easier.”
Borrow a profit idea from outside your sector
SmartCompany blogger Brendan Lewis loves looking at businesses from different perspectives, and says this can be a great strategy for finding a new income stream or profit generator.
“Borrow ideas from a different industry or profession. Ask yourself questions like ‘how would the movie industry make money from this?’ or ‘how would the accounting industry make money from this?’”
“This can lead you to uncovering revenue opportunities that the rest of your industry can't see.”
Form a strategic alliance
SmartCompany blogger Eve Ash of people management advisers Seven Dimensions takes the approach that in business, two heads can be better than one and suggests that companies consider a strategic alliance to boost profit.
“Take a good idea, or a product, that fits together with another business offering and create a new venture, and new energy that enables both to benefit in new ways.”
Target your top customers
Rob Nixon, chief executive of specialist consultancy firm Nixon Advantage, says businesses need to track their customers, what they buy, and then target them in order to increase profits.
“The key component to developing a profitable business is effective customer acquisition. Customers are still out there even though they may be spending less. The key is the smart use of data.”
“This requires a business to bring together all their various information sources to ensure they have the best picture of where opportunities exist. Knowing how to harness the power of critical customer data can be the difference between an unsuccessful sales and marketing strategy and significant ROI.”
Nixon says businesses should establish a marketing list of frequent customers, determine how much they stand to make from marketing to them based on sales histories and then develop a program to get them in the door.
By targeting existing customers, he says, and through “prioritising your database based on the attributes of your best customers”, businesses can increase their profits with a few simple data gathering techniques.
Attack expenses – one item at a time
Launching an annual cost cutting rampage might sound like a good idea, but there are some big disadvantages. Firstly, cost control needs to be a year-round focus. Secondly, rampages tend to scare staff! Brendan Lewis suggests a more targeted strategy.
“Work your way through your profit and loss and target expenses from the highest to the lowest number, working on one or two line items a month.”
“Determine whether you actually need to have this expense, and can you get a better deal.”
Plan for profit
Tony Markwell, national head of privately held business services at Grant Thornton Australia, says businesses are missing out on profit not because they aren’t trying for it, but because they simply don’t put the structure in place to achieve it.
“One of the biggest reasons why a lot of businesses don’t make a profit is because they don’t plan properly. I’m talking about setting out an actual action plan, a budget, with a date and a set goal for when the business will be profitable.”
But Markwell says these plans need to be realistic.
“A lot of people just budget in isolation. Profit is about following through with that budget, but businesses don’t often achieve it because they never plan to even have that profit in the first place. Expect it, and then work on a plan towards it.”
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