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Increase your profitability in 2012

9th February 2012 Print

Whichever way you look at them, business forecasts aren’t particularly bright for 2012. But there are steps you can take to increase your profitability without having to make large investments. In fact, putting a bit of time into your business could be the best way to get more cash out of it.

Here are 10 things you can do to help your business achieve better profit margins without compromising your service levels or reputation.

1. Market: ensure you know your market and are technically able in all aspects of the business. Stay at the cutting edge of your industry. Always be aware what the competition is doing so you can retain your unique selling point.

2. Product: ensure your product knowledge is complete and that your service is the best it can be. When you get it right, your customers become your best sales people.

3. Sales: maximise sales. Take advantage of cost effective ways of increasing sales – for instance using online platforms, engaging with social media, seeking recommendations and referrals from professionals, staff or customers and looking for new ways, and places, to promote your company. It’s about adding value not adding cost.

4. Pricing: be wary of reducing prices to increase sales. Not only could you end up underselling your product or service, unless costs are also cut, overall gross profit is reduced without a similar reduction in the contributions arising from the increased volume of work or sales. Neither should you dismiss a price increase for fear of a loss of customers - there is evidence to show profits can rise substantially. Do the maths! Work out what effect a 10 per cent price rise would have on your net profit even if you lost five per cent of your customers.
For instance:
Sales 100,000+10% = 110,000 less 5% = 104,500
Cost 60,000 less 5% = 57,000
Gross profit 40,000 (40%) 47,500 (45.4%)

5. Direct costs: keeping these at an absolute minimum may involve looking carefully at the rate charged by suppliers. Before you jump into changing suppliers, consider the service levels you receive and whether a new supplier will be able to meet them. The objective is to expand sales income while controlling, and if possible, reducing direct costs to produce an overall increase in gross profit.

6. Rates: For all those involved in charging a rate for a job it’s important to ensure your working time is used effectively. The average self-employed person should endeavour to charge for 35 hours a week. As a useful discipline a timesheet should be kept. This will assist in identifying the proper utilisation of your time. Research the rates charged in your industry by your competitors.

7. Overhead expenses: business expenses should be maintained at a minimum and any additional overheads must result in increased profitability and efficiency. Negotiation is key. Keep the lines of communication with suppliers open so you know about new deals, special rates or discounted prices. Maximise buying discounts by buying at optimum levels.

8. Finance: financing can be a costly expense for businesses. Be sure you are on the best finance deal available to you. Get quotations from your supplier, bank and finance company and ask your accountant to look over them.

9. Books and records: always be aware of your business income and expenditure. Regular, reliable and prompt accounts are absolutely essential if you are to monitor the overall trends and patterns of income and expenditure relating to your business activities.

10. Professional advice: of course, this comes at a price. But using experts can help avoid pitfalls that can cost you dearly in the long run. And the right kind of professionals should help you put procedures in place which streamline your systems so keeping their future input to a minimum.

Rawlinsons is a firm of Chartered Accountants, Business and Tax Advisers providing a complete range of accounting, business, taxation and specialist services to more than 3,000 clients.

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