Eight ways to improve profit in a business
‘How to improve profit in a business’ is a common question. Probably the question to ask first is ‘How do I increase gross profit?’ The reason gross profit is so important, is that if you can’t make a decent gross profit, you’re never going to make a good net profit… so this is the place to begin.
Selling more goods and services is often seen as the best way to improve profit. What we often see though, is that whilst sales go up, profit doesn’t always follow. This is due to costs and overheads blowing out and eating up the added sales. It’s amazing how businesses, like people, often live right up to their income!
A great way to ensure some of the funds from those extra sales end up on your bottom line and more importantly, in your bank account, is to focus on costs and overheads, just as much as sales.
Firstly let me explain what I mean by ‘Cost of Goods ’ (COGs).
These are sometimes referred to as ‘Direct Costs’ e.g. if you’re selling a product, it’s the cost of the actual product and any added costs to get it into your stock room or onto your retail shelf such as ‘freight in’. If you’re selling a service, it’s the cost of the service person and any materials used on the job. Other expenses such as office rent, admin staff wages, stationery etc. are called Overheads or Indirect Costs.
An important thing to understand about the impact of reducing COGs, is that every dollar you save goes straight to your bottom line. Whereas when you make a dollar sale, perhaps only as little as 5 cents ends up on the bottom line, due to COGS, overheads, finance costs etc. This is a pretty sobering thought and a big incentive to focus on managing COGs and overheads.
If you’re in a price conscious and competitive market your only avenue of making profit is often by managing and reducing costs.
Here’s eight ways you can reduce COGs to increase your profit:
1. Reduce materials used on jobs by managing wastage and write offs.
2. Maximise efficiency of contractors and staff.
3. Review and negotiate with suppliers.
4. Look for innovative ways to change the way you perform processes.
5. Check ‘Industry Benchmarks’ to see what top performers are achieving.
6. Manage your margins by regularly looking at the percentage of COGs.
7. Use ‘Purchase Orders’.
8. Have good bookkeeping processes for managing COGs and payment to suppliers.
The important thing to remember, is that every dollar saved in COGs, goes straight to your bottom line and may be a lot easier to achieve than the extra sales needed to get the same result.
For more details on achieving the eight ways, download the white paper How to Grow Profit with $0 on Marketing! at info.cfooncall.com.au/how-to-grow-profit-with-0-spent-on-marketing