Concept:
Profitability is a key concern for many businesses. In essence there are only three ways to improve your profits:
- By increasing your sales
- By reducing your costs
- By increasing your prices
The businesses that are the most successful have a continuous improvement approach. With regard to increasing prices this is not something that happens automatically every few months but it is a considered action undertaken as and when appropriate and necessary. They may approach increases by account or by sector taking account of the commercial circumstances in each thereby looking to optimise profitability. Small changes within a business can have a dramatic effect on profitability.
Take a look below:
In the above example, the Company has sales of 1000, with variable costs of 500 and fixed costs of 400, leaving a net profit of 100. As you can see, by increasing sales by 1%, profits increase by 5%. By then reducing costs by 1% – the total profit increases by 14%. If we then improve prices by just 1%, the total increase in profits is 24%
In other words, by improving on each of these 3 variables by just 1%, we increase overall profitability by a massive 24%.
The most powerful of these 3 variables is an increase in prices, because there are no additional costs involved in changing the numbers on an invoice.
You can work up the same example for your area of operation or business and then set targets in each area.