Tag: prices

Cashflow – sit down, have a cup of tea and let’s mend your business

It matters less what happens to sales, so long as profits are increasing and the objective is to earn good gross profits from the best-selling products.

I got a tap on the shoulder recently when I was walking to the office; it was the MD of a local retail business I know. We got chatting and it emerged she has a number of business problems caused by recent losses and faltering cashflow.

We were next to a cafe, so I said let’s have a cup of tea and see if we can’t fix your business.

1. Is each shop making money?

Look at the margin being made from the sales, can you have a conversation with the landlord about a rent-free period, can you only open for a few days a week?

If you can’t make a shop make money then if it’s cheaper to close it, close it.

2. Put your cashflow model front and centre in your business

Amazingly, they weren’t using a cashflow model. I bet they are now!

Once the cashflow model is in place, go to the bank and have a grown-up discussion.

3. Review the prices of your best-selling lines

Even when times are hard, customers who will spend, say, £1,000 on a particular item will probably spend £1,100 on it rather than drop down to a much lower price / quality point.

The MD has many product lines and can test very easily whether raising prices increases profits or reducing prices loses profits. It matters less what happens to sales, so long as profits are increasing and the objective is to earn good gross profits from the best-selling products.

Test, test, learn, change, test……….you’d be surprised the effect a change in margins has on a change in profits.

4. Cut your costs of sale and overheads

In her market many competitors have gone to the wall, so she is relatively successful and you can bet her suppliers will want her to succeed. So ask for price reductions and share the pain down through the supply chain.

The main suppliers should be happy to make 90 – 95% of what they used to make instead of 0%!. Again, think of the effect of gross profit margin on the bottom line.

Will the staff share a 5 or 10% pay cut or swap some part of fixed salary for a sales-based commission? Put pressure on your landlord (them again).

5. Use your own time sensibly

I was surprised she said that she was dragged down by all the stuff that comes across the desk every day. Focus on the important things. In this case:

  • cashflow
  • reducing costs of sale and overheads
  • viability of shops
  • testing sales and margins

Give the rest of the work to other people, do it later, ignore it altogether but DON’T let it get in the way of the important stuff.

And don’t forget the therapeutic effect of a nice cup of tea!

Michael

Related links:

Cashflow

Clients – are they profitable and will I be paid in good time?

The 3 Cs of pricing

Proof of Profit

Take care of the “proof of profit” cycle and you will consistently make the profits you think you should.

Companies repeat money-making activities every day but do they make the profit they think they’re making every time?

How can your business prove its profit?

Because if you can prove your profit then you can improve your profit!

By thinking about “Proof of Profit” not only can you make sure your core transactions are making the profit you think they should, you can increase that profit as well.

Five simple steps to proof of profit

1. Set your prices. Estimate the costs of the product or service, add on a profit margin and you have the price (which must be competitive). You also now know the profit you expect to make from the sale.

2. Perform the service or deliver the product. You want this to run like clockwork and mostly it will but from time to time you’ll face and have to overcome problems, which will add to your costs.

3. Measure the costs of the sale. Ensure you can gather together all the costs of making the sale and allocate them to the sale in question. Make sure your accounting system is robust enough to do this.

If you sold a chair, how much did the chair cost? What about delivery?

If you sold a haircut, how much did the hairdresser cost, how long did it take them, what were the other costs incurred?

Now you can ask:  Did I actually make the profit I expected?

4. Whatever the answer, improve upon it if you can. Think about ways in which you can edge your price upwards and your costs down. In particular, with transactions that are repeated hundreds or thousands of times a year, see what tasks you can automate or turn into systems and procedures and delegate down your organisation so that they are carried out as cost-effectively as possible.

Also, revisit any problems you had with execution and iron them out so they don’t repeat themselves and eat into your profits. Or price them in to what you charge.

5 Repeat!  Do the whole thing all over again and again and again. But each time try to do it more profitably.

If you take care of the “Proof of Profit” cycle then you will consistently make the profits you expect.

You’ll also be delivering to a consistent standard to satisfied customers and this should help your marketing and sales efforts so you can sell more and make more money.

You create a virtuous circle that always makes money for you.

It’s all about the data

In some businesses it’s easy to see what the costs and revenues from a sale are, in others proof of profit can be a little more difficult.

For instance, if you’re a consultancy selling time then make sure you accurately record the time spent on each job and begin to think of your service delivery people as variable costs of sale rather than as fixed overheads.

If your business is project-based and you buy in labour and materials for each job then make sure you can allocate each supplier’s invoice to the correct job.

Without the correct data you can’t do proof of profit accurately, so start to capture the data you need as soon as you can.

Proof of profit in different businesses

Gross profit officer

The Gross Profit Officer concept was born when we helped a marketing company that ran hundreds of individual projects each year, some worth thousands of pounds and some much smaller.

By looking at the actual profit achieved on a sample of projects each month the client was able to see which projects were making the profit they should have and which were not. They could also see the underlying reasons.

By addressing the causes of lower than expected profit on particular jobs they were immediately more profitable and good practice on project management was shared across the business.

Daily, weekly, monthly

This client takes two sales per day and drills down into them to measure the profit on each sale.

Which means they’re looking at ten sales a week.

Which means they’re looking at 500 sales each year.

Which means they’re spotting problems, fixing them and learning from them all the time.

All of which means they’re making more more money from each sale!

The more you do it, the easier it gets

Although they had all the data necessary to look at proof of profit, this consultancy struggled at first to turn it in to digestible, actionable information.

They measure proof of profit across their business for the last twelve months and the first time they tried it, it took a week!

Fast forward to today and using exactly the same data they can now produce their reports in under an hour.

Practice makes perfect!

Can we help your business with Proof of Profit?

“Proof of Profit” is a simple technique for helping you make more money. Can we help you?

Call Michael Austin on 020 7125 0270 or email info@bluedotconsulting.co.uk and let’s arrange a free, confidential meeting to discuss your business and the steps you could take to improve profitability.

Michael Austin

Related links:

Gross profit officer – appoint one today

Client profitability analysis – make more money from every sale you make

Profitability

© Blue Dot Consulting Limited

Chartered Accountants – Bedford House, Fulham Green, London, SW6 3JW

Client profitability analysis – make more money from every sale you make

Profitable sales are more important than sales per se.

Running a client profitability analysis, at least every quarter, will highlight which of your client contracts are making the profit they should be.

And which are not!

Many businesses will focus on sales as the key driver for success, but anyone can make a sale if the price is low enough. Profitable sales are more important than any sales.

It sounds weird and it’s a brave thing to do, but if some of your clients are costing you money and you can not renegotiate the deal, you might be better off without them. I bet you’ve thought of a couple already!

Client profitability analysis

1. Find the poor performers

Firstly you need to know which clients are the loss-makers. Do you have the information to make an informed decision?

Gut-feel is not good enough. Your management information systems need to tell you the answer in an objective way. Which probably means some manner of time recording if you’re selling services.

But don’t forget to add in softer measurements such as the number of new business referrals you get from the client. Lower margins from a regular referrer could be a price worth paying and a way of saying thank you.

2. Take action

Once you know the loss-makers, ask yourself whether you can change the price you charge or the service you deliver in order to make them sufficiently profitable. Your client profitability analysis has more than paid for itself if you can achieve this.

Having identified the loss-making clients, you need to contact them and give them the news. Nicely! Agree a notice period and perhaps try to offer them an alternative supplier in their area.

You’ll now have spare resources to be deployed on more profitable business.

3. Use what you learnt in your next fee proposal

Client profitability varies over a period of time so conduct this review quarterly or half-yearly rather than culling a potentially profitable relationship because of one bad month.

Finally, take what you learn about profitability and margins and bake it in to your pitches and proposals for new work, otherwise you create a conveyor belt of low profit clients simply washing through your business!

What are you waiting for – go lose some clients today!!

Do you have the financial information necessary to carry out a client profitability analysis?

Many businesses we work with lack important information through a combination of poor bookkeeping and not using their accounting software to produce the right financial reports.

If this sounds a bit like your business then call Michael Austin on 020 7125 0270 or email info@bluedotconsulting.co.uk and let’s have a free-of-charge chat to see if we can help.

Michael

Related links:

Outsourced accounting and bookkeeping

The 3 Cs of Pricing

Clients – are they profitable and will I be paid in good time?

© blue dot consulting limited

Chartered Accountants – Bedford House, Fulham Green, London, SW6 3JW