More Sales means More Profit Right?
Profit is the positive financial gain your business makes after you’ve subtracted all your expenses.
Profit is influenced by three things:
* Number of Sales
All three of these factors will impact your profit, so don’t ONLY focus on increasing sales, because if your prices or costs are out of whack then profit will still elude you!
Strangely, marketers will have us all believe it is all in the marketing; – “Make more sales, make more Profit” they cry; “Advertise more, and make more profit” – we see it in front of us every single day (almost every hour it seems). Well maybe it isn’t so strange given the sales-people who place those adverts are generally paid a salary calculated on commissions…
BUT as many a hardened business owner will tell us – profitability isn’t just about increasing sales.
Want More Profit not More Sales?
Then use these 3 tips:
A. Check your Net Profit Margin
Net Profit Margin – is based on sales – it is the amount of profit you make for each $1 of Sales Revenue ie it tells you what you get to keep for every $1 you sell.
Your Income Statement may have already calculated this for the business as a whole; but it is usually helpful to break it down on a product-by-product (or service-by-service) list to establish if any of your lines are negative, or which items can be improved, or what it is worthwhile to sell more of
Do this in two steps
Selling price less Costs = Profit
To have a profitable business this must be greater than ZERO – if it is negative you are creating LOSSES!
Step 2 – Calculate each item’s profit margin:
A profit margin tells you that for every $1 sold what proportion is profit – by creating a percentage it enables easy profitability comparisons
Mark-up divided by Selling Price = Profit margin (usually expressed as a percentage)
The bigger this number the more profit you make for each sale!
Remember: this figure will vary from industry to industry and situation to situation, higher volume sales tend to have lower profit margins and vica verca.
e.g. wine served in a restaurant can have a 200% profit margin compared to that of only 10% at the cellar door; when people are out to a fancy dinner they are happy to pay the extra.
Check your markup and margin figures regularly – every time one of your costs change (eg your electricity bill goes up) it will impact your results as well – and adjust your costs, or your prices, if necessary.
For more detailed information see – How Mark-up differs from Profit Margin.
B. Adjust your Costs
To be honest very very few businesses run so tightly there are no opportunities available for cost cutting. While you think you may already have a tight ship, consider reviewing the following areas for any weak areas. Some often overlooked examples include:
- Decrease inventory – stock control is a good way to streamline your business with savings possible for both storage and redundancy.
- Decrease direct costs – make sure you have the right suppliers for your business and negotiate for better prices or discounts for buying in bulk.
- Decrease indirect costs – for example, try to minimise waste and errors in your business or save energy wherever possible or try find a cheaper energy supply company.
C. Adjust your Price
Need a Price Rise (or a drop)??
Setting prices is a dark art… Make sure you consider these three factors to get your pricing just right!
ii) Understand your Value Proposition – use a value approach by leveraging perception of value and you can price accordingly.
iii) Understand your Competitors – working out what your competitors are doing and why will enable you to understand any gaps in the market.
For more details on this process see – Maximise your selling Price
So take a little holiday this week from trying to increase sales, and spend a bit of time checking on what is the best thing to sell, and how you can decrease your costs.
Which of these tips can you use to improve your profit this week?
About the Author
Eve Blackall the small business answer to The Supernanny.
At Smart Accounting you work one-on-one with Eve who has already assisted hundreds of business owners increase cash-flow, grow profits, and ensuring businesses fetch the highest price when it comes time to sell.