In Turn Numbers into Dollars – Increase EBIT, we looked at why an increase in EBIT is so important if you are about to sell your business. Of course, s strong EBIT remains important even if you do not currently intend to sell.
Every good business manager should monitor gross margin. It is the measure of how much money is left over from the sale of your products or services. It is money available to pay for the operating expenses of the business.
The two options you have to increase your business profits are set out below. Of course, the best outcomes may be achieved if you do both.
Option 1: Increase Sales Income
Sales income can be increased by raising the price you are charging. Often market circumstances are tight and if competition is tough then you may not have this option available. The main methods are to create new demand and to maintain prices by not discounting.
Create New Demand
Look for ways to package your goods or services or to create new demand through better marketing. This is a big topic we’ll address another time.
Evaluate the True Cost of Discounts
There is one drag on sales income that is often overlooked – discounts. I know one business that is always struggling to make ends meet because they are continually discounting. They keep trying to build up goodwill and market position, but it rarely works as customer loyalty is often fleeting. Unless you have a unique product, most buyers simply chase a comparable good or service from someone willing to offer a lower price.
Realise the Dangers of Discounting and guard against crippling your business by selling your time, effort and products too cheaply. If you are tempted to sign up for Groupon or some other Deal of the Day clone, then first consider whether Groupon may kill your business and how it may erode your EBIT.
Look at recent sales figures and analyse the effect any promotions, sales or free samples had on your profit. What did those discounts really cost you? How can discounts be reduced or eliminated?
Frankly assess whether each sale still would have been made without a discount.
Option 2: Decrease the Cost of Goods Sold (COGS)
If you are serious about reducing the cost of selling your goods then it would pay to tactically assess each expense. The following steps set out measures that can be taken.
Step 1: Gather the Data
Gather your most recent financial statements and data using (if possible) the last three year’s information.
Step 2: Analyse Your Expenses
Consider ways you can manage your internal and external costs. List your main expenses and examine ways to cut those costs.
- Can staff be redeployed or reorganised?
- Can new tools improve efficiency or productivity?
- Can you obtain similar quality raw materials at a cheaper rate?
- Can you get a volume discount on your raw materials?
- Can you renegotiate the price of raw materials?
Step 3: Analyse Your Business
Search for new strategies by assessing the honest position of your business. A helpful process can be to conduct a brainstorming SWOT analysis of the Strengths, Weaknesses, Opportunities and Threats of your business.
Step 4: Trim Your Costs
Determine if there are ways to introduce long-term cost saving technologies for inventory, production and sales or other ways to increase efficiency.
Step 5: Develop a Plan
Plan a coordinated strategy for reducing costs taking into account what your learned from the SWOT analysis and what is achievable now and also in the medium and long term.
Step 6: Work the Plan
Sadly this is where most great plans fail – they are never fully implemented. The goals and benchmarks have been set down, now work that plan. Schedule reviews of your progress and the timetable for each step to be implemented. Monitor progress and continually adjust your actions.
Photo by Gaetan Lee