Increasing profits might sound like an unattainable dream, but in reality, there are a finite number of ways that businesses can increase profits. When business owners get clear about the financial levers available to them, businesses can improve margins and achieve business goals.
To start with the basics, there are only two ways a business can increase profits:
- Raise revenue
- Lower expenses
So given that set of rules, let’s look at some strategies to raise revenues and lower expenses.
Four Ways to Increase Revenue
- Raise prices
The easiest way to raise revenue is to simply raise prices. However, this is not foolproof and assumes sales volume stays consistent even when product prices increase. This method is limited by market demand, what customers are willing to pay. Understanding what competitors are charging or demonstrating why a particular product or service commands a higher price is a great way to increase prices and maintain volume.
- Add new customers
Adding new customers is what most entrepreneurs think about when raising revenue. Increasing marketing or adding new marketing methods is typically the way to add new customers. Another related option is to offer more products or services to existing customers. Finally, former customers or clients can potentially be an easy target assuming the relationship is not damaged beyond repair. One Lucrum client asked an administrative staff member to follow-up on old sales quotes. With no more effort than a phone call and an email, the business was able to close approximately 25% of the quotes that were over 90 days old.
- Introduce new products or services
For some companies, products and services are changing every year, or new products are constantly in development and being added to the mix. Be sure to consider adding new products or services that will bring in an additional revenue stream that the business didn’t have before. This also can help a business command a higher price for its offering by being the first to market with new ideas.
Even if products change every year, consider adding something completely different yet complimentary to the existing line of services or products. For example, a hair salon could add a nail desk, a clothing store could add handbags or shoes, a grocery store could add a coffee bar, a restaurant could add catering, a landscaper could add hardscaping, and so on.
The final way a business can increase revenue is to acquire another business in a merger or acquisition. This is a quick way to increase profits and grow significantly. Be sure to do a proper due diligence assessment and pay special attention to culture and how the merger of the two cultures will affect employee morale.
A couple attractive reasons for an acquisition that are often overlooked is the ability to acquire customers and employees without the typical sales cycle or hiring process. Yes the cash flow from the business being acquired is nice but more and more often business owners are looking to make strategic acquisitions or merge to quickly staff up and not have to wait for
Four Ways to Reduce Expenses
- Negotiate for a better deal with vendors
Before signing new service agreements, make sure to negotiate the best deal possible. If a service provider asks for 5 year terms, push for 3. Strike out automatic price increases if possible, or limit them to a reasonable amount. Also try to stop auto renewal to force a re-negotiation when the original contract expires. If there is a long relationship with an existing vendor, try to renegotiate the existing arrangement or at the annual renewal. This is especially common with telecom companies, maintenance contracts, or other professional services. SiriusXM is a great example – on auto-renewal a Lucrum client was being charged almost $300/yr. With little more than a phone call we cancelled auto renewal and got the price down to just under $125.
- Change vendors
Over time, automatic price increases or rate changes can result in overpaying for a product or service. It’s a good idea to periodically put expenses out to bid to determine if the vendor is delivering value- that is a quality product or service at the right price. Sometimes a cheaper product and lower quality is acceptable, other times the high quality item is required and the cost it worth it. But the goal is to be an educated consumer to make that determination. Often a new provider will come in with a lower rate to earn the business; this can also be used to keep an existing provider honest. Insurance, uniform services, Internet service, and copier maintenance contracts are great examples of these items.
- Cut headcount
The biggest expense for most businesses is payroll, typically half of the total spend. Make sure to have an accurate organization chart, up to date job descriptions and thorough annual review process. These steps will ensure that all team members are contributing and adding value. If job performance is poor or there is not enough work to justify a certain number of employees, it might be time for a layoff or restructuring.
Also consider outsourcing a function that was previously done in-house or has a significant discrepancy in skillsets. For example, many business owners combine the administrative function with accounting. But to have accurate books, they hire a highly trained accountant and then have him or her get the mail, do filing, buy office supplies, etc. That’s like telling Michael Phelps to doggy paddle. Instead, consider hiring a part-time office manager or admin person at that salary range and then outsource the higher-level accounting just for the time required to get the job done, all while leveraging as much of the administrative role as possible.
- Cut the expense or reduce services
The best way to reduce expenses is to eliminate them entirely. It might be the business no longer needs to spend money on an item or service. Storage lockers full of old documents fall into this category- either eliminated completely or downsized to a smaller unit size or number of lockers is a common solution. Perhaps an expenditure can be automated. In this case, it’s easy to cut the expense out entirely once the automation process has been implemented and the results are verified.
If your business needs help creating a plan to increase profitability, consider asking Lucrum Consulting for a short-term CFO engagement to get on track. To learn more about how Lucrum has helped companies like yours, read our client stories by clicking here.