Profit is Sanity

As the old saying goes “Revenue is vanity, profit is sanity, cash flow is reality”, yet I find so many businesses focus on revenue. Focusing on profit margins has many benefits because often you find that you can work less while earning more! But how?

As always, it depends. There’s a big difference in approach between a business selling a service and a business selling products. Many of the principles apply commonly to both and the first principle is to actually know what your profit margin is, both as a percentage and as actual monetary values. Do you know which is your most profitable product or service? Do you know which is your least profitable? Do you know which is easiest to sell and which is hardest? Do you know which has most potential for growth and which has least – and perhaps is already trending downwards?

In many businesses I find that their accounts have not been set up to monitor and report on these vital “Key Performance Indicators” (KPIs). The business is fumbling around in darkness, making decisions based on poor information or no information. If this is even remotely like your business, I highly recommend working with your bookkeeper and accountant to help them provide you with the facts you need to make decisions in your business or the area of business for which you’re responsible.

Once you have clarity you’re in a position to start improving profitability. You could work in improving the profitability of your least profitable product or service. Or you could kill it and focus on your most profitable ones. The profit that you make is the average of the best and the worst – by shifting what you focus on, you can improve your profit even without changing the profitability of any individual product or service.

Buying better is a key way to increase margins in a product business. It’s always advisable to have at least two sources of supply, which one will give you a better deal? They want you to buy more, so work with them – ask what you’d need to do to get a better buy price? Then decide if that fits strategically as a good thing to do.

For a service business, your biggest cost is likely your team. Helping them become more efficient is one key way to increase your profits. Train them well, motivate them well. And remember that what gets rewarded gets repeated… but don’t just think of monetary rewards because the benefits are often short-lived. Be sure to also give them the right tools for their job and implement efficient systems.

And if I had to identify one key way to increase profits it would be to increase prices. If your sale prices are not keeping pace with inflation of your costs, you’re sure to be facing reduced profits! But in these inflationary times I’m hesitant to shout the “Increase your prices” message too loudly – better to be smarter about your average profit and support your customers in a tough market.

Action point: Ensure you have the figures in front of you to understand your profit margins, then create a simple plan to increase your profits. Do it this week.