Three steps to improving your profitability

Alistair Black

Alistair Black

Head of Consulting and Engineering & Manufacturing

09 October 2018

You could profit from reading on...

Richard Branson jokes about not knowing the difference between gross and net until he turned 50. In a meeting on his 50th birthday, he was presented with a sheet of numbers. “So, is that good news or bad news?” Branson reportedly asked.

The language that accountants use is at least partly responsible for causing such confusion. Sales, revenue, turnover, cost of sales, direct costs, fixed costs, overheads, indirect costs, operating profit, net profit, EBITDA…why does it need to be so complicated?

Well, it doesn’t. Choose the terminology that best suits your business and stick to it, as simplifying the equation makes it much easier to understand. But when it comes to improving profitability, it’s important to recognise that your profit and loss statement reflects past performance. Its value is to provide a baseline from which you can track progress as you take action.

Here are a few tips on how to generate sustainable profit improvement.

Step 1 - Understand what drives the numbers

As Richard Branson believes, if the fundamentals of a business are right, the numbers will follow. Evaluate every part of your business paying attention to:

The selling process and conversion rates
Pricing strategy
Process efficiency and productivity levels
Cost of quality
Customer satisfaction

These are the factors that will drive future performance, so develop an action plan to address each of the key areas in your business with clear targets, owners and timescales.

Remember that it may take time to filter through to the bottom line, so make sure you have operational KPIs that will let you know that your business is heading in the right direction.

Step 2 - Sell on value, not margin

The quickest way to improve profit is to increase selling price.

When helping business owners improve profit they often tell me that their customers won’t let them put their prices up. In the same breath they are quick to explain that their costs only seem to be heading in one direction – up – resulting in a predictable outcome.

Yet when I ask why their customers buy from them, there is usually a long list of attributes: responsiveness, flexibility, reliability, quality – very seldom is it because they are the cheapest.

The message is, if you are confident in the value you provide to your customers, don’t be afraid to charge for it. There will undoubtedly be some difficult conversations, but if you can demonstrate why your products and services are value for money you will get the price you deserve.

Step 3 - Embrace your Supply Chain

No man – or woman – is an island, and the same is true for businesses. Every company relies on its suppliers to help deliver its products or services to customers, yet too often these relationships are seen as a battle; there needs to be a winner and a loser.

The most effective supply chains are built on the principle of partnership. Of course you want the best quality for the lowest price, but rather than making excessive demands, partner with your key suppliers to identify ways in which they can help you improve the value you provide to your customers. You can both be winners!

Lastly, remember that this is a journey of continuous improvement and it is often the small changes that make a big difference. 

How can we help?

Why not profit from our experience. For more details contact me, Alistair Black, or another member of the Consulting team.