DOUBLE your profits with just a 10% increase in sales!!
There is no doubt that times are extremely tough today for many businesses. Following the tumultuous year that was 2020, many business owners will find themselves assessing the damage and looking for ways to increase sales and rebuild their business in a period of continuing uncertainty.
While this quest may lead many in pursuit of sales at any cost, it is important to not lose sight of the bigger picture, being that business is about profits and not just sales. Whilst generating sales is the first step to making profits, it is not the sole driver, and particularly in the current environment, may be difficult (and costly) to achieve in a substantial manner. Chasing sales may become a rather risky pursuit for an already struggling business when you consider that the business will often need to spend the extra money upfront in order to chase the additional sales and yet it will have no guarantees that the extra investment will deliver the sales volumes expected or needed.
Profitable Sales Should Be Your Goal
In the current environment, more than ever before, it is crucial to look beyond merely generating sales and focus on all the drivers of profit growth. When I speak with business owners and explain that it is actually possible to double (yes 100% increase) their profits with just a 10% increase in sales, many are initially somewhat dismissive of the concept. Yet this is not something which is magically achieved through anything I do, but rather based on good business management principles and a focus on collectively managing three key pillars: sales, gross profit margins and overheads.
Let us take a look at how a business might accomplish such a mean feat! Consider a business which is currently generating $1m in sales and the gross margin is 35% providing a net profit of $100,000 as per Table 1.
If this business were to increase its sales only by 10%, without any change to the other pillars, the net effect would be a 35% increase in net profit ($135,000), as shown in Table 2.
However, by increasing sales by 10%, while also increasing the gross margin from 35% to 40% and decreasing overheads by just 5%, the business can achieve a 100% increase in net profit ($202,500) as shown in Table 3 below:
Some readers might be shaking their heads right now and thinking “there’s no way I can increase my margins to that extent in this current environment”. While that might be true, I want to clarify that the key message is not that you need to achieve the specific numbers outlined above, but rather to that the power of optimising all three pillars will enable you to achieve exponential profit growth. You could for example achieve a similar outcome by increasing your sales by 18%, while improving your gross margin slightly from 35% to 37% and still decreasing your overheads by 5%, or many other combinations.
Different strokes for different folks but insights are the key for all
The formula for success will differ from business to business depending on the type of business you have, the market dynamics of your industry and the operating model you have adopted internally, however the key message remains the same; take a more holistic view and ensure that you look beyond just sales growth. Your focus should always be on firstly, understanding which are your most profitable sales channels i.e., those that provide the biggest margins, and then prioritising growth according to those channels. That is not to say you should not continue to target those sales with smaller margins (particularly if you can get these cheaply as add-on sales from existing customers for example), but just to be conscious of the types of sales you and your team are chasing and more strategic in your approach.
Understanding the profitability of each of your sales channels (customers and products) does require a good level of insight and a comprehensive set of financial reports will provide you the ability to cast an analytical lens over your sales activities to ensure your decisions and strategies are well informed.
Developing this level of sophistication in your financial reporting can, depending on the complexity of your business, be a tedious and complex process for which you may need to rely on help from your accountant or business advisor. However, while this might take some time and effort to set up, I think the numbers above demonstrate that it is an exercise well worth the investment!