Profits On Purpose | 4 Ways to Increase Profitability
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4 Ways to Increase Profitability

Fundamentally, there are four ways to increase profitability (without merging with another company).  There are no quick fixes. Gradual progress will get you there, but you must focus your strategy and execution on one or two to be successful.

4 ways to increase profitability

1)   Raise prices. 

When’s the last time you had a price increase?  Most of us are afraid to raises prices because our client may go to the competition.  However, clients that come to you on price will also leave on price.  More often than not, your clients do business with you because you have differentiated yourself from your competitors for reasons other than price.  A 1% price increase can mean a significant change in your bottom line, as we’ll see in a minute.

2)   Increase volume. 

This means more clients or more revenue per client.  However, I would discourage discounting prices to get more volume.  I had a client that was recently approached by a client asking for volume discounts.  He discovered a1% decrease in pricing meant an 8% decrease in his bottom line.  If your clients are asking for a volume discount, don’t be deluded that you can make it up on volume.  Often, you can’t.

3)   Reduce COGS (cost of goods sold). 

If you’ve been doing business with the same material supplier for year, their pencil may not be as sharp now as when they first got your business.  I’m not suggesting you shop based on price only, but if you’re not current on competitor’s pricing, you may find you can get as good or better materials or labor for the same or even lower prices.

4)   Reduce overhead. 

When times are good and the money is flowing, we don’t pay as much attention to overhead as we did during the recession.  It’s very easy for overhead to become a larger percentage of revenue than necessary.  You and your financial manager should be diligent in looking for ways to cut cost to be more efficient.  Trimming the fat every once in a while is healthy for all businesses.

 

Look for 1% improvements.  Here’s why:

 

$5 million revenue                1% increase in prices or volume is $50,000 each

$3 million COGS                     1% decrease in material cost is $30,000

$1.5 million in overhead      1% decrease is $15,000

 

The total opportunity in this example is $145,000 in profit improvement.  The reason for 1% is it’s incremental and certainly attainable.  Over time, this can have a huge impact on your business.  Pick out where you want to focus your time.

Bill McDermott
bmcdermott@mcdfs.com
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