Making sure that you have a good return on investment is key to profitability. Image courtesy of: iStock
2011 was a pretty toxic year for most people and left the UK economy reeling. Suddenly, major high street names are falling like nine pins and there seems to be no end to the ‘butterfly effect’ caused by the irresponsible actions of a few reckless and greedy people in the banking sector. However, there are ways that smaller businesses can protect themselves from the effects of the financial crisis and, while not making themselves exactly recession-proof, the shrewd entrepreneur can certainly put in place measures to limit damage and indeed nurture increased revenue streams.
While the UK in 2012 is not yet out of the woods financially, a sea-change of culture means that emerging businesses and the country’s stable of entrepreneurs are very positively placed to drive the economy forward. In order for that to happen, traditional working practices – and particularly expenses and revenue streams need to be examined and challenged at every level.
Profitability can be explained by way of a simple equation: Profit = Revenue - (Variable costs + Fixed (capacity) costs). Income must exceed outgoings - it’s no more complex than that. However, It’s how revenues are attracted and costs are controlled that are the secrets to profitability.
In its most basic form, for every pound a business saves in expenses, a pound is gained in profit. To reach a better understanding of cash-flow, you might employ the zero-based budgeting system.
This process requires the business to begin the year’s budget by setting everything to zero. This allows you to monitor carefully every pound that goes out of your business and to evaluate if that expenditure is necessary. Try first to analyse last year’s profit and loss accounts – was all expenditure absolutely necessary to keep your business going?
- Cut costs by working smarter. Use virtual communication in your business to minimise travel expenses and to cut rental costs on your office space. If it makes sense to implement a telecommuting policy in your business then do so and reap the fiscal benefits. Your employees will thank you and so will your bottom line.
- Use freelance, casual and sub-contractors if you don’t need a full team of people all the time. Apart from the obvious salary savings, you will save money on taxes and insurance.
- Encourage your workforce to treat the business as if they were its owners. Can that journey be made by public transport rather than car or taxi? Does it need to be made at all? Are consumables such as stationary being used wisely? Is your company's sickness policy being used correctly? If not, determine the root causes - either in culture or attitude - and address it.
Forget the hard-sell - that will only irritate your clients and potential customers and your revenue streams will dry up even faster. These days, it’s all about profit by stealth.
- Don’t compete on price alone. Customers are not just interested in how much a product or service costs. Many profitable brands are not the cheapest on the market but are the result of strategic marketing, customer service and a robust after-sales process. “Price” is a holistic perception that your customers will have of the whole buying experience. Did it serve their needs effortlessly and beyond expectation? If so then they’re likely to pay less attention to bottom-line costs.
- Promote your business on the strength of empirical evidence not promises. Are you able to solicit testimonials from your favourite clients? These impress potential customers and make your existing ones feel worthy because you value their opinion.
- If you’re able to, invest in a video to promote your business and go viral. This need not be as expensive as it sounds if you have a member of staff who’s proficient with a video camera and you have valuable advice to offer. Cameras and editing software are inexpensive and platforms such as YouTube are free to use.
- Use social media platforms – if used cleverly, tools such as Twitter can be an enormous revenue driver. However, beware of becoming a Twitter Toxic Brand by filling your audience’s timelines with spammy content and links.
- Identify your top 10 percent problem clients, then proactively seek out less high-maintenance, time-costly clients and, once that business is secured, increase rates for the difficult ones; they’ll soon move on, allowing you to devote time to profitable customers.
Know your clients
It’s believed that 20 percent of customers generate 80 percent of sales. Although often ignored, it’s important to be able to identify your customers’ purchasing habits. A customer database will be one of your most important investments in running any business.
There are two ways to keep track of customers, what they purchase, and how much they spend:
- If you use credit-card processors in your business, you can store customer information automatically.
- If you accept cash but not credit cards, you can train your employees to ask for record data at the point of purchase.
With statistics from such a database, you can offer promotions to quality customers or create a referral process whereby existing clients are rewarded for recommending you. Now you can track customer purchases, maintain customer relationships, and increase profits by attracting new customers through old ones.