Grow your sales and profits with these top business health checks
There’s no doubt that both 2020 and 2021 have been unusual years for businesses.
Remote or hybrid working, supply chain challenges and periodic lockdowns have brought constant change. Businesses have felt the financial impact across different sectors, with over 370,000 still receiving JobKeeper payments a year into the pandemic (or until the very end of the scheme), just doing what they needed to survive.
But with vaccine rollouts underway worldwide, the outlook is somewhat improving. That means now is the perfect time to run a complete business health check and find ways to increase profit margins, reduce costs and prepare for the years ahead.
Here are our top five recommendations to help you maximise the profit in your business.
1. Review and reduce expenses
As a big part of the profitability equation, expenses should be the first area you review when you’re looking to increase your profit margin. They’re a known quantity, and reducing expenses usually involves less effort than generating more sales. Plus, you’ll often see the impact of lowering them almost immediately.
Here are three recommendations to get you started.
Assess inventory management
Holding too much stock is expensive. It can tie up valuable working capital while running the risk of oversupply – in turn, creating hard-to-shift items. ‘Just In Time’ inventory management is an effective method which involves getting stock in only when you need it and keeping stock levels to a minimum, which can free up cash ready to invest back into the business.
Review direct costs
Direct costs are any expenses that directly relate to creating a product or service, such as wages, materials and supplies. Reviewing suppliers and contracts is a key tactic here, with savings opportunities to be found in negotiating better payment terms.
Indirect costs apply to multiple business activities, and may include items such as rent, insurance or advertising. Negotiating better rates or shopping around for alternative providers can lead to significant savings, as can negotiating better rates for leases on premises or equipment.
2. Assess the profitability of your product or service lines
The natural next step after reviewing expenses is to look at increasing sales. But before you do this, we recommend doing a deep dive into your product or service lines to determine which ones are worth focusing on.
To do this for each line, you’ll need to calculate:
- The cost of production: consider all elements, including materials, utilities, wages and packaging.
- The cost of selling: consider elements, such as shipping, advertising and customer service costs.
Once you have a clear picture of the cost of each product or service, you can then explore ways to boost sales for those with the best profit margins. This is the time to get creative: the various options available to boost sales include cross-sell initiatives, additional staff training or new marketing campaigns via efficient and trackable digital and brand-response channels.
Meanwhile, it might be time to review the positioning of lower-profit-margin products in your overall offering, to determine if there are any opportunities to rationalise them.
3. Explore new customer segments
If you have an established product or service, it can be difficult to find new opportunities within the same target customer base. In these cases, one of the best strategies to grow sales and profits is to simply target new customer segments.
When identifying new segments, consider customers with needs that closely align with your product or service. Do those needs make them a natural fit and therefore a warm audience that could bring a new source of revenue to your business? What are the research-led insights that you can draw upon to target these different customer segments?
Methods for targeting new customer segments include:
- Cross-selling to your broader customer base: your existing customer database can hold a wealth of information to help you identify cross-sell opportunities. Not only will selling to existing customers be easier than selling to brand new ones due to their predisposition to your brand, but it will also sustainably increase their customer lifetime value.
- Partnering with other businesses: working with businesses that sell different (yet often complimentary) products or services to the same segment can provide a clear path to increasing profits in a company. The right co-branding partnership can expose you to a whole new audience, while also providing real value to your customers.
- Expand to new channels: new technology and marketing-led channels offer diverse opportunities to reach your target audience. We saw just how valuable this approach was in 2020, with many businesses that moved to predominantly online-selling seeing sales soar.
4. Audit the productivity of your staff and systems
Increased productivity across your business means you can get more output from the same resources. It’s one of the most effective strategies to increase profitability and have a direct impact on your bottom line.
The best productivity impacts can be made in two areas: employees and processes.
Numerous studies have highlighted the link between employee engagement, productivity and increased profitability. Engaged employees are happier, perform better and are more likely to go the extra mile and elevate the performance of those around them.
Consider providing a balanced mix of incentives, training and benefits as part of your overall employee culture (or people plan) to create a more engaged and profitable workforce.
Processes across your business constantly change and evolve. And as they do, so do the opportunities for streamlining. Reducing double-handling, minimising repetitive tasks and automating worthwhile processes can all help to reduce the time spent on non-value-add tasks.
This is time that your employees can better spend on high-value, revenue-generating work that helps to maximise your profits.
5. Get working capital working for your business
One of the strongest markers of both a healthy balance sheet and a healthy business is your working capital position.
A sign of good business management, a healthy working capital position will leave you with enough cash flow to cover your short-term expenses. It will strike the right balance between growth, profitability and liquidity. Working capital can also be a cost-effective way to fund business activity such as purchasing more stock or ramping up staff headcount to take on a new project.
One of the most common cash flow issues is having money unnecessarily tied up in the supply chain. At best, this restricts your company’s ability to quickly act on any opportunities and can limit your growth. At worst, inadequate cash flow can impact your credit rating and the viability of your business.
You can do several things to get cash flowing and improve your working capital position, including:
- Offer early payment discounts
- Negotiate shorter payment cycles
- Investigate invoice financing to unlock cash tied up in your receivables
- Consolidate supply chain management and payments within one system
Take time to take stock
Many companies have been doing business reactively over the past 18 months. However, the new financial year reminds us that it’s more important than ever to check our progress along the way.
For longer-term success, proactive business profitability health checks can go a long way towards growing sales and maximising profits.
If you’re looking for finance to power your business growth, reach out to us today.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.