As a business owner, without profit you won’t be able to guarantee the long-term survival of your business. It provides the vital funds needed for reinvestment and growth, and is the lifeblood of the organisation.
Increased profit generally comes from two strategies:
• cost reduction and efficiency
• changing the business model
Using both of these strategies cohesively will mean that your chance of improving profits over the longer term will increase and be more sustainable. It also provides you with the ability to adapt to changing market conditions.
The profit formula (profit = sales – overheads – variable expense) is a practical and simple tool for identifying changes to be made to the components of profit in order to improve it. The profit tool can be quite powerful in pin pointing opportunities and strategies to increase sales and decrease overheads and variable expenses.
When reviewing your business model, look first at decreasing variable costs and overheads then look at increasing sales and generating review streams to improve profits long-term.
Cost reduction strategies
There are a number of ways business owners can reduce variable costs and improve your cash-flow:
• negotiate better buy prices with suppliers
• reduce the number of suppliers
• exercise tighter control over stock holdings to free up cash
• get rid of obsolete/slow moving stock. Consider a ‘bargain bin’ approach to generate cash
• focus on better stock management including carrying less slow moving stock
• improve labour management including rosters, staffing and overtime
• improve operational efficiency by lifting productivity and output with the same level of resources and cost structure
• improve delivery efficiency and reduce over-delivering product and services
• avoid discounting prices on lower-margin products and services. Consider bundling in supporting products/ services for a higher price
• don’t discount unless you can achieve the same or better gross profit margin There are also a number of ways to reduce general overheads to increase profit:
• review staffing or consider contracting rather than recruiting
• reduce discretionary expenditure
• look at bundling or aggregating expenses such as telecommunications
• reduce any double handling to improve efficiency and productivity
• identify the expenses that keep you in business and make sure you don’t cut them
Increasing sales and generating revenue streams
40% of those surveyed in the RSM thinkBIG 2015 study expected growth through increased sales
Being able to assess where sales can be increased requires you to complete a current revenue stream analysis. This includes reviewing where revenue comes from, whether each stream is growing, declining or stable, and what the financial impact of each stream is to identify gaps and opportunities for growth in existing streams.
Once that is done you can begin looking at other potential sources of revenue including expanding or changing current revenue streams. You should compile the top three opportunities based on:
• perceived value to your customer and what they will be prepared to pay for it
• being a natural fit with your existing business that will provide synergy
• ease of doing it given any additional costs or investment in equipment, infrastructure, etc.
You also need to consider any barriers that will prevent you from converting these opportunities and the possible actions to overcome these barriers. This might include access to capital, cashflow, employee head count or supply chain restrictions.
As a business owner it is important to focus on the long-term sustainability of the business by making sure the business is primed for profit. This involves reviewing and adjusting the business model to ensure that variable costs and overheads are minimised and your sales and revenue is maximised.
While recognising the critical importance of compliance in areas such as tax, RSM Bird Cameron also help SME owners take the next step to longterm wealth creation through sound business planning.
If you want to improve the bottom line for your business, call Andrew Sykes of RSM Bird Cameron on 6217 0333
Connected for success
For a full copy of the RSM Bird Cameron thinkBIG 2015 report which includes recommendations and tips for businesses as well as many useful case studies, head to rsmi.com.au/thinkBIG2015.