Every business owner would like to make more profit, but many are held back by focusing on the wrong things.
The secret to increasing your profit is: don’t focus on profit. Focus on the factors that drive profit.
With that in mind, we take a look at the four best ways to grow a business profitably…
Why focusing on revenue is the key
Profit is the outcome; the end result. It’s quite simply what’s left over from your revenue when you deduct your expenses.
Profit is the final score. Just looking at the final result and saying how much you want it to increase won’t make any difference.
By focusing on the four factors that will create more profit, the end result improves naturally.
So, with profit being what’s left after deducting expenses from revenue, it should be no surprise that increasing revenue is an important factor in growing a business profitably.
Revenue is the number of customers you have, multiplied by the number of times they buy from you and how much they buy each time.
Revenue = Number of Customers x Number of Transactions x Value of each Sale
This leads us to three of the ways to grow a business profitably:
- Increase the number of customers*
- Increase the frequency that customers buy from you
- Increase the average value of each sales transaction
A word of caution here: many businesses that accomplished all of the three goals above actually made less profit and some are no longer in business.
How is that possible?
There are two possible reasons.
First, they grew their sales faster than the business could manage without addressing the fourth really important factor…
- Improve the efficiency of your operations
A danger here is to conclude that increasing efficiency means doing the work of producing and selling for lower cost. That’s only partially correct.
Yes, we want the cost of production and selling to be lower. But the solution is not necessarily to reduce the actual cost in the belief that $1 saved in cost will be $1 more in profit. If you reduce costs so much that you no longer have the capacity to produce the same amount, you certainly won’t be able to grow.
A strategy for increasing efficiency could be to automate steps in your quotations process so that you can convert more enquiries into sales. Your costs may not reduce but the number of customers and new sales will increase, without needing to add extra sales or an administration team.
Without increasing the efficiency of your sales process, you would need to add extra sales team members to cope with the extra sales, reducing the profit from the extra revenue you have just generated.
The second reason for failure despite increasing revenue*
The second reason that some businesses fail despite increasing revenue is that they achieve it by increasing the number of customers of the ‘wrong type’.
Attracting the ‘wrong’ customers for your business is a fast way to reduce profit. You need to increase the number of customers that your business really needs.
So, we can rewrite the first factor as: Increase the number of customers of the type you want
The Pareto principle applies to business: “20% of your clients contribute 225% of your profit. The other 80% eat 125% of your profit.” (Robin Cooper & Robert Kaplan)
How to grow your business profitably
None of the four factors above can be considered in isolation, consider each factor’s impact on (or the impact from) each of the others in order to grow a business profitably.
And there’s no standard formula for improving profitability; it depends entirely on the specific circumstances and the relative strengths and weaknesses of your business.
A profit improvement strategy may involve either an increase or a decrease in each of the four factors – it’s really quite simple.
But to successfully grow your business profitably will require some hard work and expertise from an experienced business head.
Our advisers take the time to understand your business and your market before working with you; we then help design and implement a strategy for growing your business profitably. Contact us to get started.