The techniques that you use to manage your business finances should include ways to improve the profitability of your company. This includes understanding and using your business's profit drivers to benefit your bottom line.
Profit drivers are internal or external factors that affect your business's bottom line. Understanding your profit drivers and how they impact your business is key to developing effective strategies to improve your profits.
The company accounts and profit and loss statements usually have information on profit drivers for the business. Identifying and focusing on the profit drivers in your company can help maximise your gains and achieve better growth results. Keep track of your profit rivers and regularly measure their impact to assess the success of your strategies.
Profit drivers are generally two types: financial and non-financial.
Financial profit drivers are directly associated with amounts and are considered the most common in relation to your profit. Some examples are price, fixed costs, variable costs, sales volume, cost of debt, inventory levels.
A financial profit driver is usually expressed as a:
· number (e.g. average number of sales per month)
· amount (e.g. the average sale volume per customer)
· percentage (e.g. percentage of customers who are repeat business).
Non-financial profit drivers also affect your bottom line but aren't expressed in amounts. For example, customer satisfaction will always impact the number of goods sold and increase or decrease profit.
Non-financial profit drivers include productivity, customer satisfaction, quality of the product or service, quality of the product or service, training of staff, employee satisfaction and morale, product and process innovation, business culture and values, market share, employee safety.
Consider your profit drivers and identify why they're important to the success of your business. This will help you rank your profit drivers from most important to least important.
The top profit drivers common to most businesses include:
· increasing sales (revenue)
· improving gross profit by either increasing price or reducing costs
· reducing overheads by improving efficiency.
This can be achieved in several ways. For example, you could improve the quality of your product for a similar price and set the sale price higher, reduce overheads by improving inventory management, or increase repeat business by improving customer satisfaction.
Strategies to increase sales revenue
· Find new customers—new customers can help grow your business.
· Develop new product lines— the best source of new ideas are your customers, ask them about what new products or services they are interested in.
· Focus on your most profitable customers—it may be more profitable to sell fewer products to higher spending customers than to focus on increasing sales volume alone.
· Work with your best clients—find out who your best customers are, what they buy and when they buy it. You can use this information to market and advertise to them more effectively.
· Up-sell and cross sell—persuade your customers of the benefits of your more profitable products and pitch additional products.
· Find new markets—do market research to find opportunities to expand into new areas.
· Customer service—improve your customer service and develop a staff training program.
· Increase your prices—review the prices of products regularly and adjust accordingly. You may increase a small amount at a time.
· Price discounts—consider sale discounts and promotions to increase your customer base (e.g. 2-for-1 deals or happy hour).
· Increase productivity of your staff—recognise and reward staff with staff performance appraisals. Regularly up skill and educate employees.
· Retail displays—use effective retail displays to increase sales.
· Decrease inventory—use stock control to streamline your business and improve profit and cash flow. The less money you have tied up in slow-moving inventory, the more profit you can make.
· Decrease direct costs—build relationships with the right suppliers for your business and negotiate better processes or discounts for buying in bulk. Don't make unneeded purchases.
· Decrease indirect costs—minimise waste, train your team to be efficient and use low-cost marketing techniques.
· Decrease overheads—save money in areas like energy consumption and find cheaper suppliers.
· Remove unprofitable products and services—concentrate on popular products or services with the highest gross profit margin.
· Benchmark key financials—benchmark your business to compare your costs (like rent and utilities, etc.) to similar businesses in your industry.
