This is part 2 of our 8 part series on the Awesome 8 areas of a business we focus on as Virtual CFOs. If you missed the first instalment click here to check it out. This post is all about profitability, what it is and how to improve it.

If you have a basic understanding of how a profit and loss statement works, you’ll know that the “bottom line” is profit. It is what you have left after calculating all of your revenue then deducting all expenses. So it makes sense to maximise your revenue and minimise your expenses right? Damn right. So how do you do this?

In my previous post on Revenue Growth I spoke about driving revenue for your business. However when increasing revenue, there are sometimes associated costs that follow to facilitate this growth. I’ll show you what I mean. Say you want to increase revenue by bringing more customers on board. So you increase your customer base from 1,000 to 1,500 and revenue increases accordingly. But now you need to deliver to these customers and to do that there is going to be an increase in wages due to more man-power needed to service more clients and some other increases might be occupancy expenses (rent, light & power etc.). So the goal here would be to watch your associated costs and ensure that the increased revenue is not being eaten up in expenses.

Another example is if you are a retailer of goods. So you purchase goods at wholesale prices and sell at retail. To sell more goods you are going to have to buy more goods so the monitoring of your “cost of sales” is super important because the margin you make, the difference what you buy and sell for, is your gross profit.

The simplest way to increase profits is by increasing your prices. Think about it. If you increase prices then your revenue will increase but none of your expenses will change. Why? Because it doesn’t cost anything to increase prices. When working with a new client this is one of the first things I will review and action. I have found that inherently businesses, especially those that are service-based, are under-selling themselves. Yes a couple of clients may drop off but that’s ok, you’ve now dramatically increased revenue and profits so you can afford to lose a few. In many cases they are not your perfect client.

Where many business owners go astray is in understanding the relationship between cashflow and profit. Profit includes many “non-cash” items such as depreciation and amortisation but also excludes “cash” items such as drawings and principal payments on any loans.

Understanding your profit margins are usually measured as a percentage of sales. So if your Gross Profit is 65% and your Net Profit is 30% what this means is that for every $100 of sales you have $65 left after accounting for your cost of sales and $30 left after accounting for all expenses. Depending on the business model you run, be that low cost, differentiated, niche, lean etc. your business may have dramatically different profit margins than a business running a different model.

Minimising your expenses is another strategy to increase your profits margin and in my eyes is unfortunately something many small businesses put too much emphasis on. It’s all about buying the cheapest and spending the least and scrimping and scraping where possible. In this blog I wrote about how the number one goal for small business should be to increase revenue to 1 million dollars and I still stand by that strategy. I am not suggesting you disrespect your expenses, if anything, review your outgoings but then get back to your sales and marketing to grow revenue.

But my favourite avenue to increase profitability is by becoming more efficient. What I mean by efficiency is completing the same task with the same quality in a shorter time frame. So in essence you are completing jobs quicker but not sacrificing quality. For this to happen, you need to have great systems and checklists in place. Also embracing systems that are leveraged through technology can dramatically increase efficiency. Think about sending someone a letter versus sending someone an email. I plan on writing a separate article on efficiency but for me this is the first area of a business that needs addressing before trying to grow as most businesses are not equipped and are not able to scale and deliver on this growth in work. If we can get the internals running very smooth and quick and efficient then when your marketing team ramp up the work, you are poised and ready to go.

Brad Turville

Brad Turville

Director @ BJT Financial | Helping private businesses fast track their business growth through big firm expertise and boutique firm service.