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How to Increase Your Profits in a Downturn
Let’s face it. Every business needs profits – to expand, to invest in new things, to enter new markets, pay investors, or in these uncertain times – just to survive.
So what are your strategies for increasing your profits? And are you confident that everyone in your business understands these?
When you simplify it, there are just 3 ways to increase profits:
Which of these would impact your bottom line most favourably?
Say we manage to increase prices by just 1%, cut costs by 1% and also manage to increase sales volume by 1% - what effect would these have on your business?
Whilst you should be able to calculate the impact of the first two on your profits, you need to understand the split of your costs between variable and fixed in order to calculate the impact of a 1% increase in sales volume. You need to distinguish which of your costs stay the same whether you sell one unit or 1 million (i.e., your fixed costs) and which vary in line with changes in activity (i.e. your variable costs).
Take hotels for instance, where occupancy, (i.e.volume)is a key performance indicator. Businesses like Wotif.com.au have been successful since they help hotels go after this volume.. If your business has high variable costs, e.g. a petrol station, your focus should be on margins, not on volume.
So let's get back to our calculation. If you made each of the 1% changes cumulative, what would be the impact on your business? For a business with variable costs of 50%, fixed costs of 40% and therefore a net profit margin of 10%, the cumulative impact of these three 1% changes is 24%. Not bad!
You might ask which of these changes would have the most significant impact? In this example it would be the price increase, as this extra revenue will flow straight through to your bottom line.
1. Increase Prices
In tough economic times, increasing your prices might not appear to be an option. However, remember that any profits from a price increase would flow straight through to your bottom line.
2. Reduce Costs
Faced with a global down turn, it is inevitable that this will be a focus for many businesses in the next 12 months. Cutting salary costs is often the first thing to be considered. However before reducing staff, make sure you have examined your other costs.
3. Increase Sales Volume
This is probably what most businesses continually focus on. Whilst important, it's vital not to chase every sale.
For some businesses the sales process can be very protracted and so a lot of resource (and therefore cost) can be devoted to this activity.
You need to focus your energies. Consider drawing up a profile of your best customers - those that earn you most of your profits. Identify the common characteristics and ensure you know why they buy from you. Then prepare a strategy to attract customers of a similar profile.
Finally, remember that none of the tactics discussed will get implemented effectively unless:
In my next article I will examine ways of improving the communication of finance.
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