Profitology

Category: Business Profits

  • 5 Proven Business Growth Ideas You Can Actually Use

    5 Proven Business Growth Ideas You Can Actually Use

    You’ve survived the startup stage of your business. Great work.

    What could be more fascinating and challenging than giving birth to a company? Well, like parenting, the hardest (and most thrilling) part is yet to come.

    Most entrepreneurs think that setting up a business is the most dangerous stage in their entrepreneurial venture. Yet the truth is, growing a business can be far more exciting and perilous.

    Think about it. You are most vulnerable when your business is at the verge of growing.

    As the demand for your promising product and service increases, you are busier than the day you started your company.

    Even the manager you hired is likely preoccupied with daily operations. Your employees also struggle to meet the order deadlines while keeping the quality of work high.

    Five Tested Business Growth Tips

    Many books have been written about ‘growing a business’. The problem with most of them? At best, they are impractical,  filled with inspirational quotes and vague concepts that do not resolve the real issues, frustrations and concerns faced by business owners.

    Instead of looking for quick-fix solutions, you need to examine timeless business principles to succeed when you reach the critical stage of growth:

    1. Refine or redefine your vision for the company. When you started your business, growth was one of your obvious goals. It could be through better sales, larger profits, greater market share, etc. Now,  it is worth asking yourself where you want to take your business in five, 10, or 20 years and  visualise exactly how you would get there.
    2. Identify potential opportunities for business growth. Know as much as you can about your target market and its current players through analysis and forecast. What is the nature of the new market you want to enter? Is it predictable or highly volatile? How would you size up the present players in that market? Can you win against them? If not, find underserved niche or customers and serve them better.
    3. Put in place systems, controls, and processes for growth and expansion. With your current organisational activities, will you be able to handle growth properly? One significant area worth looking into is your financial control. Some tough questions you need to answer are:
    • Have you set up seamless systems for managing your cash flow?
    • Do you know how to timing purchases right?
    • How do you effectively manage your accounts receivable?
    1. Surround yourself with great people who share your vision. Do you have the right people at the right seats? Does everyone in your company understand and work according to the vision, core values, and standards you have developed over the years? Remember that you need a cohesive team in order to move forward. Know when and how to hire, reward, review, fire and retain employees.
    1. Bring in professionals to poise your company for growth. As a business owner, you have so much to do in so little time. No wonder why some entrepreneurs look for professionals to help them manage the financial, marketing, and sales aspects of their operations. These people are business advisors with valuable skills and experience to help you come up with a structure, a system, and a sound strategy to scale up your business.

    Bonus tip: choose only one (tried and tested) entrepreneurial operating system and put it to work. Gino Wickman, author of the book, Traction:Get a Grip on Your Business, believes that there are only six fundamental factors that determine the success (or failure) of your growth attempts:  people, vision, data, issues, process, and traction.

    When all these moving parts work together  toward the same goal, your business can begin to grow successfully just as other companies have been doing for years.

    Over to you: Which areas of your business operations need more work to handle potential growth and expansion? What do you believe are the keys to sustaining business growth?

  • The Price is Right, or is it?

    The Price is Right, or is it?

    The pricing strategy of a small business often determines the ultimate success or failure of that business.

    Small Business Owners commonly set prices with a view of being the cheapest in the market, with no consideration as to the total costs involved with delivering their product or service.

    The following factors should be considered when setting prices:

    1. The total costs involved in providing the product or service, including cost of goods sold and overhead expenses
    2. Competitors’ prices and the quality of their product or service compared to that of yours
    3. The supply and demand of your product and service. For example, you are only one of limited suppliers of a product you have more control over the price that you set for that product.
    4. The planned position of your business within the market. Is your business placed at the top end of the market with superior quality and value-add features or do you aim to offer cheaper alternatives focusing on a high volume of turnover?

    The following scenario demonstrates how a price increase of just 1% can impact on the bottom line, compared to increasing sales volume by 1%.

    Table 1 – Increase in Sales Prices by 1%

    Initial Turnover

    $100.00

    1% Price Increase

    $101.00

    Less: Cost of Goods Sold

    ($60.00)

    Less: Cost of Goods Sold

    ($60.00)

    Gross Margin

     $40.00

    Gross Margin

     $41.00

    Less: Overheads

    ($32.00)

    Less: Overheads

    ($32.00)

    Net Profit

     $8.00

    Net Profit

     $9.00

    Table 2 – Increase in Sales Volume by 1%

    Initial Turnover

    $100.00

    1% Volume Increase

    $101.00

    Less: Cost of Goods Sold

    ($60.00)

    Less: Cost of Goods Sold

    ($60.60)*

    Gross Margin

     $40.00

    Gross Margin

     $40.40

    Less: Overheads

    ($32.00)

    Less: Overheads

    ($32.00)

    Net Profit

     $8.00

    Net Profit

     $8.40

    * Cost of Goods Sold increases by 1% due to the increase in volume of products being sold.

    A 1% increase in prices results in a 12.5% increase to net profit, whereas a 1% increase in sales volume only increases net profit by 5%. This doesn’t take into account the extra time and effort involved in generating the additional 1% volume of sales.

    Getting the price right is key to the overall performance of your business.

  • Break-even Sales

    Break-even Sales

    Nine out of ten businesses incur expenditure simply by opening their doors to customers. Common expenses that may be incurred include rent, staff salaries, telephone line rental and insurance.

    Do you know the level of sales that you need to generate on a daily, weekly, or even a monthly basis in order to meet your fixed expenditure and hence break-even?

    The break-even point of your business is where the income generated is equal to the expenses incurred in operating the business. As such, every dollar of sales above the break-even point will contribute to net profits.

    To calculate the break even point you must determine the total expenses ie, fixed costs plus variable costs then determine the number of sales you need to generate to cover the costs of operating the business.

    A Fixed Cost is an expense which remains constant regardless of the amount of sales generated by the business. An example of a fixed cost is rent.

    A Variable Cost is an expense which increases as sales levels increase, and vice versa. An example of a variable cost is sales commissions.

    The basic formula for calculating the break-even point is:

                        Fixed Costs                 

            Gross Margin Percentage

    For example, if the fixed costs of a business are $25,000 and the gross margin percentage is 40%, the sales amount required to break-even is $62,500.

    This is demonstrated further as follows:

    Sales Revenue              $62,500

    Less: Variable Costs*   (37,500)

    Less: Fixed Costs         (25,000)

    Net Profit                        nil

    * Variable Costs are calculated as sales revenue multiplied by the variable cost percentage (100% – gross margin percentage).