How to find hidden profits in your business
Business consultants will tell you that there are three ways to increase profit.
Either you need to find new customers, sell more to your existing customers or sell more frequently. However I believe that there is a fourth way to increase your profits that is often overlooked.
Profit is made up of income less the costs of sales and overhead expenses. The three ways to increase profit only relates to increasing revenue and ignores the costs of sales and overhead expenses. Every business has the potential to increase profits by simply reviewing their expenses.
Let’s look at an example of the steps you need to take to apply this to your business. John is a legal practitioner in a regional centre where he employs 4 lawyers and 2 support staff. He has been in business for many years and has an established practice and clientele. His income has been steady over recent years but his profits have been declining.
In order to find the hidden profits in his business, he took a complete review of all his costs and in relation to each expense and every supplier he asked the following questions:
1. Is this cost essential to running the business?
2. Do I use this cost?
3. Can I get a better deal on the pricing for this expense?
When John reviewed his overhead expenses he discovered some interesting facts. He found that he was paying for online subscriptions that he was no longer using and hadn’t cancelled. He immediately took steps to cancel these.
He found that he was paying for five packets of chocolate biscuits every week which were being consumed by just two of his employees. He decided that he would provide one packet of chocolate biscuits a week and buy a packet of family assortment biscuits which interestingly lasted a couple of weeks.
He was also paying for hire of plants in the office with an agreement that meant that he was paying for a person to come to his office every two weeks to water the plants. The amount he had paid over the years was equivalent to having bought those same plants 20 times over. He cancelled the service and bought some plants at the nursery and agreed with one of his support staff that watering the plants would be added to their weekly duties.
A review of his general business insurance delivered a saving of 60% of the premium. This was partly due to changes in his requirements for insurance but also by changing insurance companies he got a better rate.
He also asked for new quotes for the office cleaning and saved money on those costs too, and instructed his admin staff to shop around in future for printing costs which delivered further savings.
The next area that John reviewed was his cost of sales which in a legal practice meant his disbursements. There wasn’t much he could do on these costs as they were mostly fixed prices and he didn’t have the volume to get better rates.
When John had reviewed all his costs, he had identified savings of $ 2,000 per month. That meant that with just a small amount of effort he had added $ 24,000 to his profit.
But the review wasn’t over. There was one other area that John still needed to address. His employment costs. This was a difficult area for John to address as he was conscious that everyone who worked for him needed to be working to support their families. A number of the staff had been with him for many years and they were diligent workers who knew the clients and the internal systems and procedures.
John reviewed each staff member’s situation one by one. Firstly, he reviewed the professional staff and looked at their salaries and other benefits, their productivity and how much revenue they had earned over the previous 3 years. Although there were differences, he was happy that they were all doing well.
He then turned to his support staff and again looked at their salaries and other benefits, considered their workload and their productivity. One of his workers was being paid top dollar and wasn’t performing as well as he wanted. The other was being paid well and was performing exceptionally well but would regularly run out of work. John identified that if he replaced his non-performing admin with a new employee he could potentially save a further $ 2,500 per month, giving a further increase in profit of $ 30,000. John didn’t make this change immediately but over a six month period, he was able to put this in place.
The process of reviewing all his costs netted John an increase of over $ 50,000 in profit. How much hidden profit have you got in your business? It is worth the time to take this review which I recommend is done on an annual basis. You might be pleasantly surprised at how much hidden profit you find in your business.
About the contributor:
Amanda Fisher fuses accounting and technology to help improve business. Amanda’s mission in life is to educate business owners on how to understand and interpret their business numbers to make informed decisions. She shares that knowledge in a fun and inspiring manner. Amanda’s easy to understand style has enabled her clients to come to grips with the numbers and use them to improve cashflow, profits and their take home. Website: http://amandafisher.com.au/