I’m often asked by established business owners, what is the fastest way for them to generate more profit. In fact there are only two answers and the best solution is very simple: reduce your costs. Let’s look at this solution by examining the impact on a typical business:
Costs & Overheads: £150K (60% turnover)
Profit: £100K (40% turnover)
Let’s say that we can reduce our costs easily by just 10%, and that these savings do not affect turnover, what has this done to our profit? Well, Turnover remains at £250K, but now our Costs & Overheads are £135K, which results in our Profits increasing by 15% to £115K.
The reason I show this example, is that most companies will start by looking at what is often a more complex solution e.g. increasing turnover. And not only is it more complex and often takes longer to achieve, but you also have to generate a higher percentage of turnover to make the same gain in profit! If we work the numbers in reverse this time starting with our required profit:
Profit: £124K (40% turnover)
Costs & Overheads (60% of turnover): £186K
So, to make the same gain in profit requires a whopping 24% increase in sales to get the same result.
This simple process can rapidly make your business additional money, but I’m amazed by how many companies never seem to review their spend on an on-going basis once they have supplier relationships in place. Is this you…?