Don’t overthink profitability it’s marginal gains that matter!

Don’t overthink profitability it’s marginal gains that matter!

The professional way to run a business is to analyse continually, making adjustments and improvements subject to the enormity of the changes required and the companies focus at the time. Finding the ‘golden egg,’ ‘hero product’ or service that will generate substantial margins and increased profitability is almost impossible. The danger is to overthink this process and look for the alleged quick resolution. This article details how and where to look for those marginal gains that will dramatically impact on your bottom line.

It is common for business owners to try and find a quick fix or miraculous profit-making product or service.  It certainly is desirable for all business owners, but increasingly tricky, unless you have something genuinely innovative, ask yourself “are my products or services genuinely new?” The most effective method for increasing profits is to focus on marginal gains in all areas of your business. The 1% incremental improvements can quickly compound into much healthier profitability if achieved in every department.

How to decipher where to start building those profits

Seeing the ‘wood through the trees’ within a complex business doesn’t come with quickly. It takes time to analyse each area of the business to identify efficiencies, create strategies and implement the improvements. The following information will help you look at the company holistically and appreciate how you improve your profitability.

Price rises

The most evident direction for improved profitability is to increase the prices you charge for selling your services and products. For many, increasing selling prices comes with trepidation, with a fear you might lose some customers, but consider this; in reality, how many customers would you lose by putting the prices up by just 5% per cent per annum.

If you are a business called ABC Ltd with revenues of £500,000 per annum, equating to 1000 individual transactions per year at an average value sale of £500, and you increase your prices by just 5%, the return is an additional £25,000 of income generated to cover increasing annual overheads, they never stand still, and improved profitability. If your customers believe in your products and services, will they look elsewhere?

Operational costs

Every business owner should have clarity about the expenses to provide each of their products or services, and they should be scrutinised regularly by reconciling with the monthly financial management reports and performance KPIs.

Can you reduce expenditure by cutting out blatant wastage by investing in new people, systems, machinery and software to increase productivity?  I believe every business can achieve numerous marginal gains by interrogating their operational functions from procurement to customer services.

If you review the previous company example for ABC Ltd, achieving a £500,000 turnover, and the cost of sale is 50% (£250,000), producing a saving of 1% in five operational areas (5% overall) would equate to an additional £25,000 of income saved. Therefore, along with your 5% increase in sales generated, you have created a further £50,000 net income (10%) without incurring any acquisition costs towards new clients.

One key profitability factor when expanding is that the percentage of overheads decreases as the business grows if they are kept under control until a significant CAPEX or infrastructure investment is required. 

Establishing KPIs

One business assessment tool I use during the process of improving performance is to review key performance indicators (KPIs), focusing on strategic elements of the business, typically including finances, operations, administration, sales and marketing and technical. The assessment enables you to set your incremental ‘improvement’ targets and then look at setting the goals you need to achieve them.

To help you, I have put together a KPI assessment document for you to download and assess your business priorities.