Written by: Tim Rylatt, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
A topic that everyone wants the answer to! While much has been written on how to increase profit for businesses, with a host of training and guides on the subject, very little is directly targeted at increasing profit specifically within small or medium-sized enterprises (SMEs).
The good news is that the team at UK Growth Coach have developed a new model to share with you that will help you strategically manage, control and achieve greater levels of profitability within your SME.
Where other profit models fail
Firstly, we should say there are some good profit models available but there are also many which are irrelevant and unachievable to SMEs.
Most of them are not holistic enough to give you a full picture of how to manage and plan to increase profit within your business. For example, if you spoke to a range of accountants about how to increase profit, many would likely say you needed to reduce your costs.
Whilst not incorrect advice per se, cost reduction is only one element that can help improve profit. In many cases cutting costs can actually see a decline in your profit! For example, cutting out effective marketing that generates a positive ROI (return on investment) will start to hurt your company quite quickly, and stopping R&D (research and development) or staff training may well lead to negative growth in the medium term.
This is why a holistic business perspective needs to be taken by SME business owners when they look to strategically increase their profits. By learning how “profit flow” really works in your business, you can better select the right objectives, strategies and tactics to improve your profit position.
Increasing profit can be a challenge for SMEs
There are particular challenges SME business owners face when it comes to identifying and actioning ways to increase their profit.
The majority of business owners have not been trained in how to run, manage or grow a business. They are often experts and well trained and qualified in their industry but have not had the same level of guidance or experience in running and building their company. This means when it comes to collecting and analysing key performance indicators, and determining the actions from them to grow profit levels, they can be somewhat mystified! Without this essential data collection for an insight into your own business, there is a high risk of either simply not knowing where the issue or opportunity lies, or making the wrong decisions.
Relationships with suppliers tend to be stronger among the SME community, so there can be hesitancy to shop around to ensure the best prices and services.
There is also frequently a degree of hesitancy in increasing prices to customers and clients, because of the fear of losing business. Business owners are often ‘at the coal-face’ and have to explain the reason for price rises and bear the brunt of any feedback. Without a strong value proposition, that isn’t price-led, this can be an uncomfortable position to be in. Being the sales person and the operative can lead to the two relationships feeling conflicted.
Through a combination of greater business knowledge, KPIs and a strong value proposition though, the barriers to increasing your profit can be reduced or even removed.
Let’s first look at which KPIs you need to know and understand to be able to start increasing your business’ profit levels…
How opportunity flows into your business
A lead contact is somebody with whom your business has achieved connection with and there is communication happening back and forth between you, but it has not yet led to a formal inquiry or a request for any form of proposal.
There are three ways in which lead contacts come into your business:
Primary marketing – These are brand new connections that you are making, so your marketing here is everything you do to develop that lead contact from the cold market.
Secondary marketing – Is the communication you have ongoing with your existing customer base and in this case, you are looking at a known lead contact but for a future opportunity.
Tertiary marketing – Are lead contacts generated from tactics such as referrals, recommendations and introductions.
Progression rates: Creating your sales pipeline and conversion rates
Your progression rate is about how you develop these “lead” contacts into true “opportunities” – meaning they make a specific enquiry with you that can result in a proposal.
What tactics and activities do you undertake to turn these lead contacts into active opportunities, and do you know how effective your tactics and actions are at doing this?
Your sales pipeline, and associated metrics will give you those answers!
The next step is the sales win rate (also known as sales conversion rate) which is very simply the percentage of opportunities that translate into being customers – driven by the things you and your business do to help that person say yes and place the order.
The value of your customers: Order value and frequency
It is great if you have a high conversion rate and lots of customers, but what is the average order value and how often do they make a purchase from you? These factors are the difference between simple transactions, and a good level of turnover.
These two metrics will vary significantly between company types, and whether they offer products or services. Even a small % uplift in the average order value or getting customers to order more frequently makes a significant difference to your bottom line!
You need to understand your current position to be able to proactively identify what you can do to change these numbers in the future.
Your gross margin minus costs
From the figures above you get your turnover. If you want more turnover, open up the taps on the areas identified above by improving the strategic mix, tactical selections and the efficiency and effectiveness of their implementation.
As well as ensuring the turnover can be boosted, you can also work on your margins.
Cost of sales or goods – there is a really good explanation of what this means to SMEs here but in short it is your production costs, the costs associated with winning the business and then delivering it.
Fixed costs – your overheads, which do not fluctuate regardless of how many customers you have or the value of their orders.
Where the earlier areas explained are viewed as taps we want to open to enable more profit potential to flow into and through the business, the gross margin and fixed margin elements are areas that we want to view as valves to be tightened up – to reduce the level of profit that bleeds out of a business.
Remember the old adage that “turnover is vanity, but profit is sanity (and cash flow is reality)”.
Your final figure – the EBITDA
EBITDA is your earnings before interest, tax, depreciation and amortisation. This is the most important number from a business owner's perspective, as it is from here that you can decide the financial allocation you will make to the various tax liabilities (essential), the offsetting of depreciation/amortisation (wise), and the distributions to shareholders (nice!).
Ways for SME business owners to maximise their profit using this model
For each of these taps and levers, there are strategies and tactics you can deploy to either increase or decrease the numbers. By making small changes on each of them, you create a significant compound benefit across the board, and in the resulting EBITDA.
Rather than trying to double the metric on one tap or lever, focus on making small, and thus more achievable, improvements across each of them. You’ll soon see the benefit.
Marketing – to generate leads from primary, secondary or tertiary marketing (everything from networking, through to PPC, SEO, websites, print marketing, emails, direct marketing and much much more!)
Enquiry generation – sales and marketing efforts to persuade the leads to make an enquiry.
Sales win rate – increasing your conversion rates through a mixture of sales and marketing messages, and salesperson training.
Order value – ways in which you can upsell and/or cross sell by understanding all of your client’s needs.
Order frequency/volume – proactive and regular communication to secure more orders from existing customers.
Variable and fixed costs – ways to reduce costs from negotiating with suppliers through to operational efficiencies, reducing waste and much more.
Your next steps to generating higher profits
The first thing to do is ensure you know your current position across all of these numbers.
As Andrew Lang once said: “Most people use statistics like a drunk man uses a lamppost; more for support than illumination”. Don’t be that person!
By understanding your numbers you can then choose the priority objectives, the right strategic thrusts to take forward, and the application of the most appropriate tactics to move those numbers the way you want them to go.
If you would like some expert guidance and advice while you work through this process, we’d be happy to offer a complementary 90-minute Business Review with any business turning over more than £100,000 per annum.
During that session we will look at your current business position, owner skill sets, challenges and opportunities. Together we will then appraise ten different business progression factors in the context of your company. If you are interested, we can then also discuss relevant support options to help you make real and meaningful progress. If you’d like to see how we have done that for lots of clients to date, why not watch some of our client experience videos.
Tim Rylatt, Executive Contributor Brainz Magazine
Tim is a business coach to smaller/medium-sized business who have found themselves on a ‘plateau’ in terms of performance and want to make a change. He gets real pleasure from seeing business owners reclaim control and create personal/work-life balance. His valuable real-world insight and experience spans many sectors and industries, with businesses at all stages of their journey from start-up through to exiting a business. You would be hard pushed to find a more experienced business coach, having worked with around 250 companies throughout his career. He is also a published author on the subject.
