How to make your business more profitable

31 May 2020

Every business has the potential to become a multi-million dollar success story, rising from the shadows and becoming an industry leader. Unfortunately, for many businesses, this is a dream that’s hard to reach. Starting and running a business requires a multifaceted approach that covers every single aspect. From the staff you employ to the clients you deal with, it can be challenging to say the least.

If you are looking for ways to boost productivity, improve profits and operate as a professional organisation, there are a few main things to focus on first. Each of the points featured in this article will give you a better understanding of the steps to take and what to be aware of – resulting in a higher chance of running a business that is much more profitable.

Know your business drivers

Business drivers are the key activities and inputs that drive both financial and operational results. For any business to be able to build solid business strategies and financial valuation models, it’s vital to know what your main business drivers are.  Some common examples include:

  • The number of online and real-world stores.
  • The average size of each location.
  • Rental costs and utility rates.
  • nits of production and the volume of products sold.
  • Production costs for manufacturing goods.
  • The number of salespeople and employees and their effectiveness.
  • Wages and salaries of employees.
  • Commissions, sales expenses and fees.
  • The amount of website traffic you have.
  • Website conversion rate.
  • The price point of the products or services you sell.
  • Commodity prices, such as rubber, oil, plastic, etc.
  • Forex rates for international trading.

So, how do you go about finding your primary business drivers? This will all depend on your industry, whether you’re a brick and mortar store or strictly online, and what your operations are. However, it all begins with finances. Specifically revenue. Some questions to ask include:

  • What drives your businesses revenue? For a real-world store, this will be the volume of sold products x average sales price.
  • What drives the volume? This is driven by how many products you have and the effectiveness of your salespeople.
  • What drives salespeople numbers? This is determined by the size and number of stores you have.
  • What drives store numbers? This is determined by capital, making it a core driver. Nothing comes before this.

Ultimately, the number of stores and locations is classed as a key driver. On average, there are five key drivers of every business.

  • Cash
  • Profit
  • Assets
  • Growth
  • People

People are at the centre of everything and are interconnected with each of the four remaining areas, helping to effectively drive them. People drive profit, profit drives assets, assets drive growth, growth drives cash. Even if you reverse this pattern, the outcome is still the same.

Know your break-even point

As a key financial analysis tool, calculating your business’s break-even point helps you better understand areas of profitability. To begin with, you will first need to have a good idea of the fixed and variable costs of the products your business produces. From this information, you’ll be able to calculate the breakeven point of your company. In turn, these calculations help business owners determine how many units and at what price point they’ll need to sell them at to be able to break even. 

There are three variables that need to be taken into account when working out your break-even point. These include:

  • Fixed costs: outgoings that are not connected to sales volumes, such as rent and utilities.
  • Variable costs: the costs that are dependent on sales volume, including the cost of manufacturing products.
  • Sales price: how much each product unit sells for. 

As soon as you have all of this information to hand, you’ll be ready to use the break-even point formula.

Fixed costs ÷ (price – variable costs) = BEP per unit.

As an example, let’s say the Business ABC calculates it’s fixed costs as being property taxes, executive salaries, asset depreciation and it’s lease adding up to $100,000. Their product; an organic eye cream has variable costs that include manufacturing materials, labour costs and sales commission. The variable costs have been calculated to $1.60 per unit and the eye cream is priced at $4.00

With all of this information, we can calculate what the break-even point for the product will be. 

$100,000 ÷ ($4.00 – $1.60) = 41,666 units.

What this means is that they have to manufacture and sell 41,666 units to cover both fixed and variable expenses. If they can achieve this, they will break even, but won’t have any profits. This formula allows Business ABC to look at where to reduce manufacturing costs or increase the sales price to start generating a profit.

Ensure staff have Key Performance Indicators (KPIs)

In the world of business, it’s important that your staff have key performance indicators to work with. At the end of the day, it’s your employees who will be instrumental to the overall success of your business. Therefore, you don’t only need to get the right people for the right jobs, you have to be able to retain them. This is where KPIs come into play.

Using key performance indicators for employees helps ensure that businesses get the most out of their most important investment – their employees. Engaged employees not only reduce operational costs while increasing productivity, but they are also much more likely to stay with their employer, provide above-average customer satisfaction and experience few safety-related issues.

So how do you go about finding the best employee KPIs to implement? Start the process by thinking about what it is that you want to achieve with regards to your employees. Then delve deeper by asking more questions until you find your leading KPI.

Some of the main things to consider can include:

  • Number of employees
  • Customer service quality
  • Satisfaction of customers
  • Customer interaction counts
  • Customer retention
  • Ongoing industry education
  • Number of key hires
  • Employee turnover rate
  • Number of A-players

Let’s say that you want to increase the number of A-players on your teams. You first start by measuring the core values and performance of each employee, assigning a grade of A, B or C. Using a KPI dashboard, the percentage of A-players is logged and tracked. 

Now let’s say that the A-player percentage is at Just 32% using current KPIs. What changes to your strategy could help drive this figure up? You could aim to raise the bar and only have A player management. In turn, these A-players are put in charge of hiring other A-players while coaching and guiding their B-players. These B-players are then given the chance to improve their performance and grading by setting daily goals and targets to achieve the end goal. Anyone who falls to a C-player should be given a set time to improve or face the chop.

There isn’t a one size fits all strategy for employee KPIs. Unless you genuinely understand your business goals and the people who work for you, it can be challenging to implement effective KPIs.

Be mindful of discounting to win over businesses

A common mistake that many businesses make when trying to increase profitability is to start discounting to try and win over other businesses. It’s not uncommon for buyers and distributors to try and seek discounts on your service offerings or products. Business is business everyone in the chain is looking to turn a profit – but this shouldn’t be at your expense.

Offering a promotional discount for new distributors or clients can work in your favour; as long as it doesn’t become the norm. Regular discounts can lessen the perceived value of your product, which in turn, can lessen the actual value of it. if you give a discount to every new customer who asks for one, the perceived value will automatically be reduced. Ultimately, your product or service is only worth what people actually pay for it.

Another issue with discounting from the get-go is that it sets a  precedence of expectation for all future transactions to be discounted. Because you already lowered the perceived value of your offering, clients may have an issue with paying the actual rate in the future. This can cost you precious industry connections. 

Your product or service offerings should always be backed with one hundred percent confidence in its value – both by you and the client. If you start reducing its value, clients may start to question whether it’s as good a deal as they first thought. All of these can force you to start cutting corners to turn a profit; which ultimately reduces quality.

Discounts in moderation and as a means of onboarding a client can work. But never devalue your assets to snag a contract. Sometimes, the best thing you can do is walk away.

Monitor Staff and Client satisfaction

As we mentioned earlier, your employees are the lifeblood of your business. Unhappy employees can lead to decreased client satisfaction. Therefore, it is vitally important that the satisfaction of every single employee is well taken care of. In the world of business, especially in the private sector, it’s common practice to measure customer satisfaction. As we all know, customers are important. But overlooking the health and happiness of staff can be detrimental to your business’s success.

Any level-headed and rational business owner knows that the most valuable resource they have is their people. The level of satisfaction and wellbeing of employees has a direct impact on the organisational performance and success of a business. Unhappy and dissatisfied employees are likely to foster a negative way of working. This has a knock-on effect on the way customers perceive your business, resulting in lower customer satisfaction scores.

To be able to improve employee satisfaction, employers need to understand what they’re motivating factors are. These typically include the following in order of importance:

  • Rate of pay
  • Job security
  • Working conditions
  • Company management
  • Recognition
  • Responsibility
  • Nature of work
  • Personal growth

To understand where these fall in line with employees, you need to know how each member of staff operates, individually.

  • Are they ‘survivalists’ whose drive to work for you is to survive (rate of pay will drive them more than personal growth)?
  • Are they ‘seekers’ who look for personal satisfaction AND great rates of pay?
  • Are they ‘contributors’ who are driven by making a difference instead of the financial reward?
  • Are they ‘socialisers’ who need a fun and active work life while helping others in their roles?

To help you get a better idea of how employees feel within your organisation, doing regular performance reviews and sending out anonymous satisfaction update forms can really go a long way with helping. 9 times out of ten, underperforming employees and high turnover rates are due to poor management and a lack of empathy – not the cause of the employees themselves. If these are issues you have noticed, it’s time to take a closer look at those higher up the chain and take action as necessary.

The same is true for your clients. You should regularly be monitoring their interactions with your business and reaching out for feedback. That’s not to say every single transaction should have a 50-page report attached to it, but being mindful of how they are taken care of should be a priority.

What to do next

If you are not sure what steps to take next, or just don’t quite know the direction to head; Magnolia Advisory is here to help. Our industry experts are able to analyse your current business operations and formulate a plan of action to help drive profitability. We understand that every business is unique and requires an individual approach, specifically designed to fit its needs.

Find out how we can help make your business more profitable so you can look forward to a more streamlined and profitable future.