How Do I Make More Profit?
Building a Profit-focused Company
It is rare that people get more than they aim for. Say that someone is learning to be an archer and has as their goal just hitting a target fifty yards away, the result will be more or less ability to hit that target, not more – and, occasionally, by lucky accident, they might hit the bulls-eye in the center of the target. But if the goal is to hit that bulls-eye from fifty yards, and that is the focus of all the practice and effort, the chance of hitting that bulls-eye will get very good over time, and rarely, if ever, will the larger target be missed.
The financial target of most small businesses is not making a Profit, the bulls-eye of business. Most are focused, instead, on another target altogether: Survival – always just ‘breaking even’, making just enough to pay the bills, with hopefully a little something for the business owner. Some years are good and the owner can take home a decent salary. Others are poor, and the owner makes do with much less than a full pay, thereby subsidizing the business once again. But, the ongoing, targeted goal of the business, year after year is simply just survival.
To make a Profit, the business needs to focus, not on breaking even, not on survival, but on business profitability – literally, the ‘ability’ of the business to aim at and produce a specific dollar amount of profit as a percentage of projected gross income. Only when this is the clear business target is it possible to build a business that can deliver profit to the owner year after year. Only then can that business truly become an ongoing, revenue-producing asset for the owner.
How is this done? How can a business become a profitable asset? Show me the Money! Most small businesses are inherently profitable. Depending on the business, a reliable profit of 10% to 30% of total annual sales already exists as the potential, ongoing profit return on investment of the company. But where is this Profit? Why is it so hard to see, let alone produce?
Mining The Gold That Is Already There
All of the Profit is right there – just on the other side of Survival, in a place called profitability that most small businesses have never really seen. It would be like having a gold mine and drilling along just a few feet to one side of that motherlode, not knowing what it looks like; not knowing it’s even there! And if they have not seen it, and don’t yet know what it looks like, what would inspire these businesses to go there?
As we have seen, most businesses are aiming at Survival - constantly hovering around the “Break-Even Point”. This Break-Even Point is that amount of incoming revenue that exactly covers all the business expenses. Not more and no less. In short, this point is Survival.
All the dollars a company makes up to the Break-Even Point, could be called “Survival Dollars” and there needs to be enough of them to cover all the costs of the business if it is to avoid running out of funds, energy and morale. If less income is received, the company begins to starve. There is never any profit in Survival Dollars, only debt.
All the Profit of a company comes after this Break-Even Point. It could also be said that all the dollars earned after Break-Even are “Profit Dollars” – because a portion of each dollar, by definition is Profit to the company.
There are two kinds of expenses in a business: ‘direct’ expenses (sometimes called ‘variable’ expenses); and ‘fixed’ expenses. Every dollar a company makes has a ‘direct’ cost that includes: any materials or other product that the company sells, and any labor needed to create value out of those materials (in a professional service organization, there is only the cost of labor). This means that for every dollar the company receives, a percentage of it is always a cost of producing the product and/or service that the company sells to receive that dollar. This direct cost may vary widely in different businesses (from 30% to 70% of all revenue), but every business has this expense on the first, the last and every dollar it receives. Therefore, these production costs are called ‘direct’ expenses and go up and down directly in proportion to revenue.
Next, there are ‘fixed’ expenses, which are those costs that (generally) stay the same whether the business makes a little or a lot. These are expenses like rent, utilities, office salaries, etc., and include the cost of a fair salary to the President or General Manager
– a role so often taken by the business owner. The Break-Even Point, then, is that level of revenue where the ‘gross profit’ that remains after paying all the direct costs for production is the same and exactly covers all of the fixed expenses. This leaves zero net profit, but all the bills are paid.
An Example:
Let us say that a company brings in ,000,000 per year, and the direct expenses of this company are 60% of all revenue. And, let’s say that the fixed costs of this company are 0,000 per year. Since the direct costs of this company are 0k, the amount remaining of ,000,000 to pay for fixed costs is 0k, leaving [['content']] profit or Break-Even.
Now let’s say that this company builds a “Marketing Engine”, that allows it to market its goods and/or services much more effectively, and the income rises to ,300,000. The direct costs of 60% of this revenue would be 0,000, leaving 0k gross profit available to cover the still fixed costs of 0k. This leaves a net profit of 0k. 0,000 in profit divided by the total revenue of ,300,000 is 9.2% net operating profit that the company has made to be used as the owner sees fit.
What happens when the company does another 0,000 in sales, or ,600,000? The gross profit (after direct costs) is 0,000, covering that same 0k of fixed costs, now producing 0,000 in net profits or 15% profitability.
And at ,000,000, double the original revenue? Even adding a little for increased fixed costs, the net profit to the business owner would be very close to 0,000 or 20%.
Could your company increase its sales by 30%, 50% or more, and still use the same facility, with roughly the same ongoing operating costs? Most can, and many companies can do much more!
The Three Systems That Power Profit
Three business systems are necessary to build a Profit-oriented company:
- The Profit-Based Business Model
- A dedicated Marketing Engine that powers revenue growth
- A Production Capacity System that can keep pace with new business growth.
Your Business Model:
As we have already seen, a business needs to know what its own Profit-based Business Model can be, so it can progress toward profitability. Without this clear Business Strategy with financial models that can measure ongoing profitability, a business is flying blind. It would be a little like trying to fly a Lear Jet with only the instruments of a little Piper Cub.
Building a Profit-focused Business Model for your business is a specialty of Business Design Corporation. BDC will work with you, step-by-step, so you will understand your company’s numbers and profit potential. We will develop workable profit goals, in an achievable timeline, that puts your whole company on track to make them come true.
Your Marketing Engine:
Most businesses are underpowered. They don’t have an effective Marketing Engine – a dedicated set of procedures that actively promotes the business and acquires new customers. Word-of-mouth and other ‘passive’ strategies are fine as far as they go, but until a business builds a cost-effective, active marketing and selling function, it will never push past Break-Even into the real money.
Again, knowledge is required – knowledge of how to identify your best customers, to learn how they think and what they want, and how you can say it so they see your company as the very best place to get it. With this kind of strategic knowledge of your company’s target markets, you can build the kind of lead generation methods and venues that most effectively attract your best customer types and easily convert them into good, long-term customers.
Your Production Capacity:
Once a business knows how to build a Marketing Engine, it is not very difficult to produce plenty of new customers for the business. In fact, it is not so hard to produce too many new customers - too many for the capacity of the business to successfully serve them.
Most small businesses falter or fail, not because they have too little business, but because they grew too fast for the company’s ability to keep up. Work gets jammed and problems arise; mistakes are made, and pretty soon, the customers notice that the work is not what it used to be. Reputations go down, growth stalls and profits fall – and businesses founder. What happened? Did the company grow too fast? Or did production capacity grow too slowly?
It is always a balance, but with strategic Planning for Growth, businesses can decide how and at what rate to increase the production capacity in relation to targeted sales. Hiring plans, tooling, training and management are all put in place in order to build and serve the targeted growth of the company. If this is done well, the business can grow in an orderly fashion, with marketing and sales able to produce just the right amount of ‘positive pressure’ on the growth of production.
Doing It Right
Profits await the dedicated business builder. Creating the Marketing Engine that powers growth while staying in balance with planned production capacity, all serving the Profit Model of the business – these are the key steps to creating a company that produces consistent and valuable returns on it’s operations for the business owner, year after year.