Every business owner talks about profits but none actually does anything constructive about it.
Most business owners would do the normal approach of cost cutting to increase profits. In my consulting experience, cost cutting strategies only work up to a certain degree. Beyond that, cost cutting would hurt the business more than it helps.
Basically the first 2 items on the cost cutting list would usually be headcount and salaries. Cutting these 2 items beyond a certain point is detrimental to the survival of the business as a whole for the following 3 reasons;
Reason 1) When you cut headcounts, someone ( the”lucky” who stays) has to take over those work to compensate for the one who were removed. This will definitely increase the workload, stress, and frustration on that employee. His/her morale and motivation will definitely drop to a low degree and thus affecting his/her job performance. It is a double whammy issue.
Reason 2) Uncertainty about who will receive the axe next will be rampant throughout the whole organisation. Creating unnecessary confusion, and chaos.
Reason 3) A percentage cut in salaries may have a damaging financial impact on employees who “just break-even” on a monthly basis. It may cause undue stress on their regular monthly bill payments etc.
In short, these 2 cost cutting strategies are NOT effective in helping any company to increase their profits in the medium and long term. These are knee-jerk strategies that we do not recommend our clients to use.
Instead we would recommend you to use the following time-proven approach that we use for our clients’ business. These strategies are so generic and fundamental that will work on your business no matter what business you are in and the state of the economy whether up or down.
In our approach, we believe that profits is something that’s totally beyond our control. Profits is an effect NOT a cause. Therefore, to increase your profits, you need to look into the causes that would produce the profits you want for your business. Sounds logical to you?
To us profits generation is a process of managing those 7 causes to achieve our profits targets. Please study them carefully as each is critical in your profits generation process.
Number of Leads (x) Your Conversion Percent (=) Your number of Customers (x) Average Sales Dollar (x) Average Purchase Frequency (=) Gross Revenue (x) Average Profit Margin (=) Gross Profit (-) Overheads (-) S,G,& A (=) EBIT.
*Note: Items in BOLD are the effects and are not within your control. Items NOT in bold are the 7 causes and they are very much within your control.
From the above formula, you know there’s no need for you to be a rocket scientist to know how to increase your profits perpetually. All you need is to focus on those 7 causes, manage them well, and your profits will take care of themselves literally.
It is a very simple and yet straight forward strategy that has proven itself time after time in all our client engagements.
It is my sincerest hope that you will apply this strategy into your profit planning for your next quarter and see your profits soar.
I wish you all the best.