Here is an excerpt from ActionCOACH's founder and CEO, Brad Sugar's book, Instant Profit:
One of the most common questions I get asked by business owners from all over the world is how they can improve their profits. Profit is the one thing they all want more of.
And that's understandable, because PROFIT is the very thing they are all in business for. This reminds me of something that Samuel Gompers said back in 1908. It was very true then and it still is today. He said the worst crime against working people is a company that fails to operate at a profit. Isn't that interesting?
Anyway, my answer to these businesses is simple, and it always comes as something of a surprise. I always tell them that profit is the one thing they can’t get more of.
That’s right; I’ll run this past you again. Profit is something business owners simply can't get more of. But they certainly can influence their bottom lines by working on, and improving, the variables that contribute towards the profitability of their businesses.
Confused? Then read on. You should view your business in terms of its five separate and distinct areas. You need to break your business down into a simple schematic of what the business looks like. It doesn't matter where you are, what you do or how big your business is, the schematic still applies. I call it the Business Chassis/ Model.
When you truly understand how a business works, you'll realize that profit's a factor that is the result of other variables and can’t be directly altered in isolation. The same applies for customers and turnover.
You can’t get more customers. But you can increase the number of leads you get and improve your conversion rate, which together will result in more customers.
Similarly, you can't get a higher turnover without improving the number of transactions each customer makes as well as the average dollars amount they spend.
Let me show you what I'm talking about by means of a diagram. The Business Steps look like this:
LEADS
(prospects or potential customers)
X
CONVERSION RATE
(the difference between those that could have bought and those that did)
=
CUSTOMERS
(the number of different customers you deal with)
X
NUMBER OF TRANSATIONS
(the average number of times each customer bought from you that year)
X
AVERAGE DOLLAR SALE PRICE
(the average price of the items you sell)
=
TOTAL REVENUE
(the total turnover of the business)
X
MARGINS
(the percentage of each sale that's profit)
=
PROFIT
(something every business owner wants more of)
Understand this: the items that come after an = sign can’t be directly influenced. But the items that come after an X can.
Profit has to do with the last part of the Business Chassis - the Average Dollar Sale (which affects Revenue) and Margins.
Activities designed to improve Revenue and Margins have a direct effect on Profit. They include things like pricing policy, discounting, up-selling, and controlling expenditure, and I'm sure most of you will be familiar with these, at least in general terms.
But there are other, less obvious, activities that are just as important. Things like cutting down on overtime, reviewing the size of your team, reducing unnecessary layers of management and decreasing your stock levels, to mention but a few.
The 4Ms of Profit:
Strategies to boost profits using the 4Ms - Management, Money, Marketing and Merchandise.
Management: team training, better recordkeeping, and effective time management.
Money: auditing, budgeting, and pricing.
Marketing: up-selling, add-on selling, and using lists of qualified leads.
Merchandise: increasing the number of big margin items or services, carrying exclusive product lines and only selling fast-moving stock.
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