Cash flow is the only real focus point for your small business. It’s a mistake to focus on sales volume because it’s not what you make that’s important; it’s what you keep. What you keep is what fuels the next cycle of purchases and operating costs. This leads you to sell more and ensures that you can accommodate growth.
How do you know if you have a cash flow problem? Check out your Net Margin. This is the percentage of cash you keep compared with what you make in sales. So if you keep $500 on $10 000 sales, your Profit Margin will be 5%.
If you are earning less than 10% Net Margin, then you can be pretty sure you have a cash flow problem. If your sales and profit are increasing but your Margin is decreasing, then you have a future cash flow problem. Around 90% of small businesses are operating with a Net Margin of less than 10%; but many don’t know it. Most businesses don’t measure what’s important.
Margin focuses on your profit in real terms. So how can you double it? Answer: The easy way, not the hard way; the way that frees up your time, not the way that requires long hours and more work.
When I ask a group of people the best way to double their profits, the usual responses are to either open more sales outlets or to increase the range of products they sell. Because I am basically lazy, I disagree with them. I don’t like unnecessary hard work. I like to work smarter, not harder.
The first thing to recognize is that any increase in sales price or any decrease in costs flow directly to the bottom line. An increase in sales volume usually increases expenses as well as sales, thereby creating extra work.
Let’s take a hypothetical case of a small business with a sample profit analysis:
Cost of Sales 60,000
Gross Profit 40,000
Gross Margin 40%
Operating Expenses 30,000
Net Profit 10,000
Tax (25%) 2,500
Net Profit after Tax 7,500
Profit Margin 7.5%
There are six key things you can do to increase your profits. Most of them cost nothing and are not hard.
1. Raise your prices
2. Improve your conversion rates
3. Increase your average sale
4. Generate more leads
5. Plug the leaks:
a. increase your staff productivity
b. reduce your direct costs (i.e. cost of sales)
c. reduce your overheads (i.e. operating expenses)
d. fix your non-performers
6. Increase your volume
In this issue, we will look at the first two options to double your profits. Then next time, we’ll look at the next two. Let’s begin.
Option 1 – Raise your Prices
● Very rarely will a 10% increase in prices be noticed by your customers. Very few, if any, will stop buying. Better yet, the few that do stop are usually the customers who cause you the most grief anyway. You’ll be happy to see these customers go. Now with our example above, that extra 10,000 flows straight to the bottom line and immediately doubles your profit, taking your margin to 13.6%.
Option 2 – Improve your Conversion Rates
● With one client, we started measuring conversion rates of shop visitors to sales. The rate then was 28%, which we showed to the staff. Without doing anything else, the rate quickly climbed to 35%, just because shop staff were aware and tried harder. Through staff training in customer behaviour (Google DISC) and some discount sales strategies, we went to 48%. That was already a 71% increase in conversions without spending a cent outside of training costs. We will be conservative and allow for a 30% sales increase. This can still be improved upon. A good product with good sales people can convert qualified leads at around 80%.
● Discount sales really work. They get more people into your store and convert visitors into paying customers. Your sales will do even better when your price tag shows both the old price and the sale price. The same concept works for wholesale catalogues. Combine these sales strategies and see what a difference they make.
● On menus, people’s eyes typically go to the top right corner. That’s where the best profit margin items should be.
So we’ll examine two more options next time. In the meantime, ponder on the two we’ve already discussed.
CEO and Co-Founder
neXtep Business Builder Community Pte Ltd
Singapore ACRA Business Registration Number: 201424522Z
80 Kitchener Road #09-09/10 Singapore 208539