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How to Increase Your Profits in a Downturn
Also featured in CEO Online

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 timesjust 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:
1. Increase Prices
2. Reduce Costs, and/or
3. Increase Sales Volume.

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).
Driving sales volume for an organisation with high variable costs is definitely not the smartest strategy, yet it's the strategy adopted by many high fixed cost businesses.

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.
Let's look at each of the three tactics or approaches for increasing your profits and whether there is anything you could do to achieve that 1% profit increase:

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.
The same happens when you give discounts- but in reverse. With regard to your pricing, consider the following:

Volume discounts: Reward your best customers by offering volume discounts (e.g. 5% discount) which take effect at certain thresholds.

Volume discounts should apply to a specific time period and to sales above a specific threshold, e.g., 5% discount on sales in excess of $500k in the 12 months to 30.6.09. This approach maintains your standard prices and acts as an incentive for businesses to spend more money with you.

Reduce “giveaways”, favours or extras included for free: Unless you really think these would have a positive impact on your bottom line. What do these extras actually cost you? Do you know?

Early payment discounts: Do your sums! Rarely does a B2B early payment proposition work in favour of both parties. However if your customers are mainly retail, these might be worth considering. You will have seen some utility companies offering discounts for early payment or payment by direct debit. Another example is where there is a prize draw if you pay by a certain date. In this latter case, the savings in bank interest often pay for the prize many times over.You need to work out your savings in bank interest before you start offering such discounts – since every business is different.

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.
With regards to cutting costs consider the following:

Buy Better: A number of businesses have gone down the “preferred supplier” route. Whilst this can lead to a heavy dependence on one or two suppliers, it's an effective way of driving down prices. Telecommunications, stationery, travel and fleet management are just some areas of your business where cost savings could be made.

Less Waste: Whether it's turning off lights when not needed or using a duplex printer, there are many ways to reduce wastage, and at the same time, help the environment.

What about your stationery stocks – have you looked at them recently? Maybe you have enough and can postpone that next trip to Officeworks! Also some office stationery and supplies can go missing mysteriously; better control or accountability might be all that's needed!

A school recently did a study of the cost of using conventional toilet rolls compared to dispensers and found the dispensers cut their costs considerably. You never know where you might be able to save!

Zero Based Budgeting: I met someone last year on one of my courses who was expected to cut $10m off a $80m budget for the next financial year. I recommended a zero based budgeting approach.

With this approach you need to start with a blank piece of paper to assemble the budget. Focus on the outputs of the business unit - the deliverables - and then work out what is absolutely necessary to deliver these outcomes.

Too often our budgeting starts with last year’s actuals and therefore we accept the base, focusing on the incremental change rather than challenging the base.

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:
1. Your staff understand the strategy, and
2. Are financially literate.

In my next article I will examine ways of improving the communication of finance.


 
© Birch Consulting Group