Too much hustle, not enough focus
It is a common question – “How do I make more profit?” All too often it is answered by thinking that the answer is to ‘do more’. Clearly, if you aren’t doing anything, then the answer will definitely start with that!
But ‘doing more’ must be the answer, because that’s how to scale a business, right? Doing more may well result in a ‘bigger’ business – bigger turnover (sales), bigger staff, bigger premises (for the brick and mortar businesses), bigger budgets, bigger marketing spend…and so the list goes on…and on…
The only thing is, ‘doing more’ may also add ‘bigger losses’ to the list as well. When ‘doing more’ goes unchecked, or even worse when there are no existing metrics in place to track any of this information through on a quarterly (at least) or monthly (preferably) basis, how can you possibly know that when you ‘do more’ it will result in ‘bigger profits’. And let’s face it, no-one wants to work harder for no extra benefit…
So if ‘doing more’ isn’t the answer, then what is? PS – it may be the case that ‘doing more’ is the right thing, but we need to make sure that we do more of the efficient and effective things when it comes to profit generation.
We need a plan – we need focus. The question “How do I make more profit?” is too big a question in itself to answer sensibly – there are *millions* of ways in which we could make more profit – the secret lies in simplicity and being able to focus on strategy and consequent tactics in such a way that we can break down the question into some bite-sized chunks. Quite apart from anything else, as a business owner/entrepreneur, it’s not like you don’t have anything else to be working on day to day in your business, is it?
So here’s a simple 3 part plan for you – take action, and you will see positive results:
It is not just about selling more – you need to understand who you are selling what to first. You need to understand your breakdown of clients.
Think about it like this: if all you see on a financial report is:
‘Sales = x’, that doesn’t really help you that much.
Imagine however it looked like this:
‘Sales (domestic) = y’, and
‘Sales (international) = z’
And when added together, these now made up the line: ‘Total Sales = x’
You now have a lot more information about your sales – the relative proportions of your domestic and international clients by their sales levels. Think about what you could now do if you understood that your domestic sales were 1%, 10%, 25%, 50%, 75%, 90% etc of the total – how would that start to guide your thinking? Is it easier or harder / more or less expensive to reach domestic customers? Are you vulnerable in your domestic market for some reason that means you need to focus on international growth perhaps? Is it easy to get your products registered in international territories? Is there a long lead time attached to that? Do international customers place larger orders, but maybe less frequently?
Your ability to think more clearly about the ways in which you may choose to expend energy in the pursuit of profit (‘do more’) is now far more apparent.
Let’s start with understanding what margin actually is:
Sales – Cost of Goods Sold (Direct Costs) = Gross Profit ($)
Gross Profit / Sales = Gross Margin (%)
So, it is basically what is left once we take away the cost of making the goods that we actually sold (for a product based business). For a service-based business, it is the cost of the labour that actually ‘did the work’.
Simply put, therefore, we need to understand how much gross profit we make (margin) for each of the products that we make (or serve with). Similar to the example with sales, understanding which products/services yield the greatest amount of gross profit will, therefore, help us determine which products/services we want to invest our time in producing and selling – where is the most gross profit to be made? We can then check as we grow what happens to our gross margin overall.
Whilst sales and margin are typically things that we feel we need to increase, overheads (expenses) are things that need to be reduced. As businesses grow, they tend to ‘bloat’ from an overhead point of view – because there is ostensibly more ‘money’ available, we tend to think that we have more to spend, but all too often, the spending is not focused and effective. Consequently, costs rise and turnover (along with gross profit) doesn’t necessarily rise as well.
Imagine spending additional money on a certain type of marketing expense when you don’t actually know whether or not that type of marketing produces a return (or specifically can’t be matched to an upturn in sales).
The second issue with overheads is that people tend to look for the ‘extras’, rather than the items where the money is really being spent – consequently, people can spend a huge amount of effort and time trying to cut down a stationery bill, when that may only be a relatively small part of the overall expenditure, whilst simultaneously ignoring their administrative staff cost, or the fuel bill which may be far more material costs to the business – if these are being overspent on because of poor management, then dealing with these issues will help the bottom line far more than changing stationery supplier. You have to be aware of the relativity of each type of expense against the others, and its overall impact on the business first.
So – review your overheads, and for simplicity, break them down into categories – I often find that I will start to review a business based on the following broad categories:
Admin Salaries and associated employment costs
Property Costs and associated expenses (eg rent, rates, utilities)
Premises Costs (repairs & renewals, cleaning etc)
Professional, Consulting, HR, Financial & Legal
Bank Charges and Finance Costs
Motor Expenses (including Vehicle Insurance, Fuel, Vehicle Tax, Parking, Mileage etc)
Travel & Subsistence
General Office Expenses (stationery, telephone, postage, computer supplies etc)
Marketing (split online / offline)
You will find this a much easier task if you break the expenses down into ‘similar’ things – that way you get to consider a section ‘as a whole’ for its impact (good, necessary or bad) as well.
Less hustle, more focus has to be the way forward (unless you enjoy doing lots of work for little potential benefit). It is the way to create a profit intentionally in your business.
PS – Sales, Margin and Overhead are the only 3 things that you have to manipulate and improve your profitability with – so focus specifically on them to generate the best result – don’t waste your time trying to answer that ‘big’ question!