Business musings...

I went to the Barclays ‘Let’s Talk More Profit’ seminar in the latter half of last year and have been meaning to post this blog for a while. Robert Craven, author and consultant, spent half a day talking to around 200-300 companies about how to increase their profits. I found it really useful and practical, so thought I’d share the key message.

There are only 5 ways you can increase your profits…and not all of them are created equal!

Here are the only 5 ways you can increase your profits:

1. Raise your prices
2. Lower your direct costs
3. Fix the underperformers
4. Increase volume
5. Lower your overheads

And the winner is…

We looked at each of the five methods of increasing profit, and looked at how effective they each were. In reality, increasing your prices is by far the most effective way of increasing your profits.

Let me give you an example:

If you sell a widget at £100, with a cost of sale of £70, this creates £30 gross profit
However, if you reduce the price by just 10%, and sell it at £90, with the same cost of sale of £70, this only creates £20 gross profit.

Therefore, you would have to sell 50% MORE widgets just to make the same amount of profit you had been previously.

So, raising prices has the opposite effect. Sell at £110, less cost of sale £70 = £40 gross profit. A 33% increase in gross profit.

The counter argument is that, based on the supply and demand curve, you would expect to sell fewer widgets if you are charging a higher price, therefore making less money. The bit about selling fewer is true; the bit about less money depends on the demand curve. There is more profitable flex in this than you might imagine.

Say you sold 100 widgets at £100 making a total gross profit of £3000 (£30 profit on each widget x 100), then increased your prices to £110. You would now only need to sell 75 widgets to make the same profit (£40 profit on each widget x 75 =£3000), resulting in less work (and therefore overheads) for the same amount of money.

In addition, it is likely that your ‘worst’ customers are also the most price sensitive and will take up the majority of your time.

So, let me put it this way…

If you would like to work less, earn the same, and get rid of your least favourite customers… consider putting your prices up!

You can then spend the time you have saved looking for new, higher paying customers. When you have found these new customers and returned to selling 100 widgets, you will now be making £4000 profit instead (an extra £1000).

The only proviso is to be aware of demand sensitivity: if your business’ particular demand curve is very price sensitive (for example, if you were raise to prices by 10%, you would lose over 25% of your customers) you will then end up making less money, not more. That said, this sensitivity may be counteracted by upgrading your branding, customer service, or product/service differentiators to justify the price increase and thereby retain more existing customers. Raising your prices might mean raising your game, but then when has that ever been a bad thing?!

And finally, what about the other 4…?

The other 4 listed above are also very valid. Robert Craven suggests you work down in order, from 1 to 5. Implement each element and then move onto the next. By working in order, you ensure that you start with those that will have the most impact on your business’ profitability.

So, why not consider giving it a go!

As businesses are starting to report a slowdown in sales and a weakening in their financial position, there has been a lot in the news about a serious recession pending for the UK, especially after the report from the British Chambers of Commerce.

So, how should you respond? Do you know how you can make your business stronger and more competitive and therefore better able to deal with a recession? Markets shrink in a recession so where there were lots of people wanting and willing/able to pay for your product or service before, there are now less people able to purchase what you have to offer. That means you are going to have to change your strategy to win the remaining customers and fight off your competitors.

Here are 5 steps to prepare your business for a recession…

1. Plan for the future
   Don’t just meander along hoping for the best – plan! Your business will work best if you know where you are trying to go and what you are trying to achieve in the next 3-5 years. It doesn’t have to be a long, detailed or ‘impressive’ strategy, but it does require thought!
2. Draw up an action plan on how to get there
   You will need decide on short, medium and long term actions out of the strategy you drew up. These are specific actionable things that you can start working on, starting immediately. There will be both big things that you can do to improve (break these down into manageable parts) and also lots of little things. Don’t forget to prioritise.
3. Forecast your money
   Prepare a 3-year financial forecast or get someone to do it for you (like your accountant). Add in your costs and expected benefits from the action plan above. Even with a positive economy businesses often over-estimate sales, so be careful. Try cutting your revenue in half and see what it looks like; how would respond if that actually happened? Try cutting it in half again. Keep updating it monthly so you can see where you are against your plan. This will give you early warning of when you might run into problems. If things get really tight, then move from a monthly cashflow forecast to a weekly one, and watch your money like a hawk. When you see a problem do something about it in advance – don’t just wait for it to hit you!
   
4. Spend time working on your business not in it
   In order to implement your plan you will need to starting working on your business. It’s the difference between say, restoring and renovating a house and just cleaning it. It can be hard work and uncomfortable knocking walls out, getting a plasterer in etc. but you end up with a much better house at the end of it. Don’t fall into the trap of just doing continual maintenance work when  actually there is significant change that needs to happen. Don’t get me wrong, maintenance is important but it won’t significantly push your business forward. Your business needs to be the best it can be in every area. If you don’t have time to do this, then you either need to make time or find someone to work with you to implement the action plan.
5. Don’t stop marketing, just do it better
   As things start looking tight many companies start to reduce their marketing budgets. Proceed with caution on this one. You should do a separate 12-month marketing plan that links into both your strategy and your general business action plan. You might not know how effective your current marketing actually is; measuring its effectiveness can be hard but certainly not impossible. Marketing shouldn’t just be seen as a cost – it should bring in more business in monetary terms over the year than you spend on it. It is worth noting there are no silver bullets when it comes to marketing; it is about a consistent, focused approach in line with your branding and strategy (hence the plan!). By all means, put your marketing effort under the microscope and work to make it more effective, but don’t just cut it to cut costs; there is a real danger that you’ll end up cutting yourself off from your life blood – your customers!

Though it would seem that there are difficult times ahead, don’t panic and don’t give up. Times like these can actually be a real opportunity. Whilst you might worry about what is just around the corner, the fact that you are looking at what you can do about it now puts you in a much stronger position than most. This could be your opportunity to build a stronger, more resilient organisation and to outshine and outperform your competitors.