Profitability is clearly a function of revenue and expenses but to improve profit is not as easy as simply increasing one and reducing the other. There are many underlying factors to consider and quite often having the time and visibility to weigh up what could be done and quantify the opportunity is just not within reach of many business owners.
Over our 30 years in helping business owners to grow and protect wealth we’ve supported many owners to identify ways to improve profit and have itemised the 10 common ways this can be achieved.
1. Analyse expenses
Analysing all of your significant business operating expenses to determine which ones are too high based on industry benchmarks. Dollars saved by scrutinising your operating costs will transfer directly to more profit for you.
2. Negotiate with suppliers
Review your material sources and analyse your suppliers to see if you can negotiate a better deal on your materials purchased. Where required, your Adviser can get involved directly in the negotiations on your behalf.
3. Reduce bad debts
Implement an effective debt collection system for your business to ensure you have no losses due to bad debts. Bad debts eat directly into your hard-earned profits. If needed, overhaul your existing debt collection policies and terms of trade to achieve this. Implementing better terms of trade and debt collection policies will improve cash flow and maximise your profits.
4. Eliminate unprofitable products or services
Conduct a formal review of your underperforming product and service lines within your business. Understand and review the margin levels on all of your products and services to determine if any need to be dropped due to poor contribution to your bottom line, noting some may well be enablers to higher margin products.
5. Restructure financing
Consider if restructuring your finances can help you save interest on your business loans. Perhaps there are cheaper options available with more appealing covenants. By restructuring existing business debt, you may save interest, and fees and charges, which will boost your profit.
Alternatively with banks being more active in lending policies now, you may find that you have access to better facilities so that you can afford more active steps to implement change.
6. Maximise pricing
Review your pricing across all products and services to determining if your prices are in line with market expectations to maximise current pricing levels. Consider which product/service lines are less price sensitive and when the last time was that you lifted your prices, a small change across a high volume sales line could significantly boost profits. Forecast what a price change could create in increased profits and contrast that against any downsides from implementing this.
7. Review labour costs
Carefully consider if there are more efficient ways to utilise your labour force, including the blend of casual staff, contractors, paying overtime versus using a bonus systems to incentivise increased staff productivity. Profits will grow if you can find some savings on wages and ongoing labour costs, such as work cover and superannuation.
8. Track advertising investments
Calculate the rate of return for your spend on advertising, marketing and sponsorships to assess if these initiatives generate enough sales and additional profit for the business to warrant continuing them. Too many business owners do not monitor the return on their marketing and advertising spend and are unsure on how to determine if the spend is worthwhile by not calculating an ROI.
9. Plan for profit
Take a day out of ‘working in your business’ and prepare a plan outlining how you’re going to achieve future profit growth. Profit growth does not just happen — you must plan for it. A flexible business plan that sets key goals and charts a course of action will provide management and staff with the clarity needed to boost the profitability of your business.
10. Identify valuable customers
Analyse your customer database and determine which customers are the most valuable to your business. Working out the profitability of each customer by assessing how much margin they contribute to your business is an incredibly insightful exercise for most business owners. Sometimes the smallest and simplest customers provide you with the least headaches and the most margin and profit, yet the service they receive from sales and support staff may not reflect that.
Your Hanrick Curran adviser is well placed to help you grow your business profit. Our experience together with your detailed knowledge of your business and industry is a powerful combination to identify opportunities for profit growth. For assistance to identify areas for profit improvement in your business please speak with your Hanrick Curran adviser or call 07 3218 3900 to speak with any of our Business Advisory specialists including Matthew Beasley, Nathanael Lee and Tony Hunt.