How do you make money in your business?
I’m not talking about top line sales kind of money, I’m talking about the money that ends up all the way down at the bottom line – your net profits.
This came up in a great discussion at last week’s Business Book Review on the book Ownership Thinking by Brad Hams. One of the keys to getting everyone in your company on the same page is educating them on how your business works…how you actually make money and ultimately how much money is actually made once everything is paid off and the dust settles. It turns out that many employees don’t know how profits are calculated or created and often confuse sales and revenue with what a business actually makes.
The good news is that although many businesses may seem confusing, with a lot of moving parts and variables there are actually only 5 ways to impact your profits – and if you can get everyone to understand those 5 things and how they work at your company, then you’re well on the path to start improving your profitability.
5 (and only 5) ways to impact your profits!
1. Generating Leads (or Opportunities) from new customers, existing customers and past customers.
Everything starts with someone raising their hand and indicating an interest in your solution. Often this is driven by marketing efforts – especially for ‘new’ customers but great customer service and a great experience in using your product or service will impact this as well – both in terms of referrals and repeat business.
Ideas for improving your number of leads:
- Improve your marketing message – identify your best target market and why they are buying what you’re selling. Are you clearly communicating those benefits?
- Create ‘wow’ moments for your customers – something they will appreciate and value, but didn’t necessarily expect (and doesn’t cost much)
- Stay in touch with everyone you’ve encountered – create a mailing list and consistently reach out to prospective, existing and past clients with something interesting and useful.
There are ton of other ideas on improving marketing and customer service – pick one or two that resonates with you and make it happen.
2. Improve your Closing Ratio and your sales effectiveness
The best marketing in the world doesn’t matter if you can’t convert that initial interest into a sale. Your closing ratio is defined as the number of leads that convert to an actual sale. If you talk to 100 people and 50 of them end up buying something from you, then you have a 50% closing ratio. Getting better at closing sales will increase that ratio and drive more revenue.
Ideas for improving your closing ratio…or your sales effectiveness:
- Implement a sales system – having a clear process on how sales works in your world will not only allow you to be more effective, but it will allow you to scale so someone else can take on that sales responsibility.
- Get some training – selling is a skill and if you don’t work on it, you won’t get better at it.
Improving your closing ratio by even just a few percentage points can make a big difference – find some ideas that will help you be more effective at sales and put them into action.
3. Increase your average sale amount
Perhaps the fastest and easiest way to make more money is to increase the amount that existing customers are spending with you. You could sell them more on each transaction or you could raise your prices – the beauty of raising your prices is that the increase flows directly to your profits (note – you might reduce your sales volume with higher prices…but there’s often room for an increase).
Ideas for improving your average sales amount:
- Raise your prices – if it’s been a while since you’ve raised prices, you’re likely overdue and most small businesses tend to under price especially considering the value they generate.
- Upsell or cross sell – what’s a natural addition, something of value that your clients should also be buying from you?
4. Improve your Gross Profit Margin – reduce your variable expenses
Depending on your business you may have expenses that are directly related to your product or service – these are expenses that are only incurred when you deliver to the customer. Your Gross Profit Margin is the difference between the selling price of your product or service less your ‘variable’ expenses (but before you take into account your fixed costs). Let’s say you sell a widget for $100 and it costs you $60 to produce it – your Gross Margin is $40 per unit. Every dollar you can cut from your variable costs will improve your gross margin (and your bottom line).
Ideas for improving your gross margin:
- Actively study and understand your variable costs – you can’t improve what you don’t know. Dig into your costs over time and make sure you understand your gross margin for all of your products.
- Emphasize selling your higher margin products or services – what’s your most profitable product? What would it take to sell more of that?
5. Reduce your overhead
The last opportunity to impact your profitability is to reduce your fixed costs – those things that you pay for every month whether you sell or deliver anything or not. This is stuff like your office or retail space, leased equipment, utilities, phone, internet, etc. Every dollar you can save (that doesn’t impact your customers) goes directly to your profitability.
Ideas for reducing overhead:
- Identify your biggest monthly costs and see if you can put those up for bid or renegotiation.
- Maximize your capacity utilization – if you’re paying for expensive equipment or space find a way to get more use out of it (i.e. run another shift or lease it out to someone else when you’re not using it).
That’s it – 5 (and only 5) ways to impact your profitability. Have you looked at your business in this way? What your current net profit and what are some ideas you could implement to improve your situation? We’d love to hear your thoughts – share them in the comments below.
Shawn Kinkade Kansas City Business Coach