When I first started my business, I knew I had to make a profit to survive because I’d read that small business owners considered their top 2 challenges to be:
- Increasing profit (almost 50% of owners thought this is the biggest challenge)
- Cash Flow (more than 36% thought this the 2nd biggest challenge
What I didn’t yet understand was that there was such a thing as ‘average’ profits for an industry or ‘industry profit norms‘.
Shortly after I started my business, I went to a business lunch and sat next to a successful business owner. Over lunch, we chatted about the responsibilities of a business owner. One of his comments that stayed in my mind was this:
“…as the director of a business, if you are not making a profit, then you are not doing your job...”.
It was then that I started to think about what profits I should be making? What should I be aiming for?
It got me wondering why business owners strive to make a high-profit margin in their business? Even more, what’s the point? Is it just so that they can pay themselves more?
Over the next few months, I got to understand that a high-profit margin increases the value of your business. In fact, the more profitable the business is, the more desirable it is. Then the more someone will want to buy it.
I wanted to understand a bit more about profits, so I found out what our current profit margin was. I compared our margin to my competitors’ margin and also other businesses in my industry. Then I found out what the ‘norms’ for our industry were.
I had a consultancy or service business. We were charging our clients for our time. I learnt that when a company sells time for money, as we did, the profit from a sale is generally split three ways:
- One third goes to the person who’s made the sale (e.g., the lawyer or the consultant)
- The other goes towards the expenses of the business (e.g., rent, telephones and equipment essential to run the business)
- The last one goes towards the profit of the business (which the owner can take out, or leave in the business to grow it)
So, in my industry, the professional services industry, I got to understand that my profit margin should be just over 30%.
It’s that last third, the profit margin, that is of interest to prospective purchasers. The larger the profit margin, the more desirable the business. Hence, the more a potential buyer will pay for the business.
Our initial calculations showed that we were making a 12% profit. Further investigations revealed that our competitors were making much less. Often under ten percent and sometimes just one or two percent.
I had already decided I wanted to run a successful business that one day someone would want to buy. I decided to structure the business so that it became a profitable market leader. Then I had to find out all the quick ways to increase the profit in my business, and this is what I found:
9 Quick Ways to Increase Profit:
1. Follow what works. Find out which business makes the highest profit margin in your niche. Then copy what they do and how they do it to get the same or better profit margin. Increase profit before cutting costs.
2. Lift your game. Focus on excellence. Create ‘raving fan’ customers for repeat business and referrals. Do great work. Stand out in your field. Get known for being the best. Promote your work.
3. Increase sales:
- Sell something different to the same customers
- Sell more of the same to the same customers
4. Customers not paying on time?
Change your strategy. ONLY EVER sell to customers that pay their bills on time. (end of story). The older an invoice, the more likely it’ll become a bad debt.
For a $1000 bad debt, you will need to make extra sales of $20,000 to ‘break even’ if your profit is just 5%
5. Ask customers: “What would I need to do to win (all) your business?”
We asked our customers “what would you like us to deliver that your other suppliers struggle to provide?”
6. Use technology: Only when you can prove that it saves time (time IS money)
- Create systems: save time and training time. Do something right once, capture the process and make it easily available to the whole team
7. Review often:
- Financial results: analyse results at the end of each month (a must do)
- Review expenditure: What are we spending that we don’t need to?
- Review rates: Are we charging market rates?
8. Apply and observe the 80/20 rule. Do some analysis:
- Are 20% of your efforts getting 80% of your results? What needs to change?
- 20% of customers often represent 80% of the profits. Who are your existing customers and what is their profile? Additionally, who are the customers that don’t buy from you? Are you marketing to the right potential customers?
- Of the 80% of customers that make up only 20% of our sales, which are REALLY worth trading with?
9. Review staff: Is everyone on the payroll being paid every week or month, earning it?
By focusing on service excellence and profit, I was then able to increase our profit margin to an average of 24%.
When I sold the business 15 years later, that healthy profit margin dictated the price the buyer was willing to pay. It had been well worth putting in place a simple strategy to increase profit.
To your business success!