Improve the profitability of your small business
Statistics show that around two-thirds of small businesses failed to make a profit last year or increase their profit at all. However, people do not realise how much a small change can impact a business. Making a series of small changes can increase profitability more than making one big change. Here are some suggestions you can take to increase your profit. Revenue and Costs – The Direct and Indirect In basic terms, revenue minus costs equates to profit. So to increase your profit you can either increase your sales or reduce your costs. Many businesses may have little control over the amount of sales they do but all businesses should have control over their costs. Negotiating prices with suppliers can be a key factor to reducing your direct costs. Many businesses tend to stick with one supplier and not negotiate prices but being aware of market prices can increase your bargaining power and potentially save you a lot of money. Costs that could be regularly reviewed in your business include insurance, utilities, mobile/telephone charges and Internet. Ways to decrease your overheads and indirect costs are less obvious compared to direct costs. A good way to lower your indirect costs is to improve your systems. For example, switching from a paper based system to an electronic system to keep important records and manage documents can help reduce your administration costs and minimises the chances for errors. It may be good business practice to review your systems on an annual basis and to seek input from staff from future improvements. Marketing and visibility It can be a very difficult task for small businesses to get their name out and having a small marketing budget doesn’t help either. One thing to keep in mind is not the size of the budget but the effectiveness of your marketing. Understanding your target audience is vital to promoting the awareness of your business. For example, as a local fish and chips shop located near a high school, you can offer a meal deal for students. The sales promotion will help attract one of your key target audiences and possibly increase the reputation of your shop through word of mouth. Also, make sure your advertisements are tailored towards your target audience. Hearing back from 10% of 200 people is better than 1% out of 1000 people. Certifications and accreditations can help put you ahead of your competitors. With the Internet being such a huge platform for communication, it is definitely to your advantage to go online. Try setting up a user friendly company website or use social media sites to increase the awareness of your business. It is a cheap and effective way of promoting your business to prospective customers. Managing your Cash Flow Interests on loans may seem insignificant at one point in time but it quickly accumulates to realisable figures that can put a dent on your profitability. Try keeping a reserve of cash that can be used to cover your current liabilities i.e. short-term loans and interests on long term loans. Having a healthy cash flow can reduce the problems you face if a short-term commitment arises. Key Performance Indicators Analysing key indicators can give light to areas of improvement for a business. Common indicators include actual sales figures against forecasts, costs against budgets, gross profit margin and staff costs. Get advice from your accountant to ensure you’re monitoring the right indicators for your business as staff tends to work towards them whether they are critical to the business or not. The Real Gems of your business In particular to small businesses, every staff member has the opportunity to spread your company’s message. Everyone needs to contribute: whether that is networking on the web, promoting sale offers or greeting customers with a smile, every small thing matters. Get them to be as motivated as you are by encouraging self-development. Reward employees who make an effort to represent the business in and out of work. By Wilson Law at Tax Affinity. Tax Affinity Accountants are considered in the market to be experts in Tax and Accountancy in the UK. Based in Kingston upon Thames they have clients right across the UK as well as Europe, Middle East and North America. For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends. Walk into any McDonald's, order a burger, and the cashier will ask, "Do you want fries with that?" Each yes adds £1 or more to that particular sale. If just a fraction of McDonald's' 54 million daily customers say yes to that question, that's millions of extra dollars in the owners pocket.
The same strategy is important for startups. You may not yet have built a large customer base, so you need to coax as much money as possible from each person who does show up. It's the old story: A bird in the hand is worth two in the bush. The issue at this stage isn't market share but wallet share. Boost the Pound value of your average sale, and you boost your cash flow and bottom line. Here's how you can bring in more of those sales. 1. Crunch the numbers. Begin by figuring out the Pound value of your average sale. If you have 20 customers and total sales of £1,000 on a typical day, your average sale is £50. Then you can set a new target and plot your strategy to hit it. Depending on your business, you might also want to calculate your average sales per hour, day of the week, employee, location, marketing campaign or other variables. Frequently the answers will lead directly to a plan of action. If your numbers are low on Mondays, for example, you can plan special Monday promotions. If one ad typically brings in a £2 sale and another weighs in at £12, you can adjust accordingly. 2. Change your product or service mix. Adding or subtracting to what you sell can help grow your typical ticket size. Take the case of a bakery that had an average sale of just £5. The problem was they offered virtually no higher-priced items. When they added specialty cakes and other premium goods, that figure jumped to £14. The same effect can sometimes be achieved by dumping lower-priced products. If you sell three different toasters, drop the £35 model and the customer will spend £45 or £55 instead. 3. Bundle your offerings. Encourage customers to spend more by giving them a package deal on multiple products or services. At McDonald's, the bundles are Extra Value Meals that include a starter, fries and a drink. At a car repair shop, it might be a tune-up and lube job rolled into one visit. You can also bundle your time. One computer repair company that wasn't making enough money charging by the hour started selling services in 10, 20 or 30-hour blocks. That new option yielded higher average sales and ensured return business. 4. Go for the add-on sale . "Do you want fries with that?" is a textbook example, but the same approach works for any business. One lawyer I know started asking whether every client had an up-to-date will. Two out of three didn't. The result was an extra £4,000 in average weekly billings. Later he repeated the feat with living wills. Another way to drive add-on sales is to create a checklist of related products for a particular kind of purchase. If you're a hardware store, a paint customer might also need brushes and drop cloths. Hand him a checklist and he'll likely walk out with more than a can of Satin White. 5. Create weekly or monthly sales challenges. Focusing your sales team on a particular area for a week or a month can also generate add-on business. When I owned photocopy shops, we pushed colored paper one week and banners the next. Some grocery stores offer specials at the checkout counter to trigger impulse sales. 6. Take hidden products or services out of the shadows. I once coached an insurance broker who sold only 1.27 policies per customer despite offering more than 14 types of insurance. A survey revealed that most clients didn't know he sold those products. He was failing to show his entire hand. Signage, newsletters and other tactics can help. 7. Train your staff to make the higher pound sale. Sometimes simply making staff aware of your target sale value will help you get there. If they're just selling what the customer came in for, you're not going to hit your numbers. Tell them what you're looking for, and then give them the tools to achieve it. 8. Raise your prices. If you're just opening your doors, price your products or services on the high side and figure out how to offer more value. Being the cheapest isn't necessarily going to pay the bills, and you'll be left high and dry when a competitor beats your price. If you've been in business for a while, don't be afraid to bump up your prices by 5 or 10 percent. Most customers won't care (You don't stop going to your local Starbucks or your hair salon when they raise their rates.) And you'll increase your margins, so a few lost customers won't make a difference. By using tactics like these to maximize every transaction, you help keep the cash flowing while you're getting your business off the ground. Once you're airborne, these same strategies can develop your flight plan for generating peak profits. Master the art of supersizing your sales early, and it will pay off many times over. By Brad Sugars writer for Entrepreneur magazine. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this article with your friends. Tax Affinity Accountants based in Kingston upon Thames are experts in tax and accountancy for small businesses. And are daily helping businessmen and women grow their business and profits despite the economic condition. To find out more money saving and business success tips follow us on twitter @tax_affinity |
Various AuthorsOur experienced accountants and tax advisers provide valuable insights into practical every day questions and issues. Archives
March 2024
Categories
All
Ask your own question: If you would like to have a tax related question answered here, please send your question to info@taxaffinity.co.uk. |