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The Power of Small Change

By Icon Business Solutions on 01/06/2015 - 0 Comments

Note: This article was published by Icon Advisor Jon Peterman in the CEDIA Communicates Business Spring 2015 edition (see Page 33)

Business owners often think that they need to take dramatic steps to improve the profitability of their business. Many believe, for example, that if they want to double their profits they need to double their sales. Still, others think that they need to take on many more people, thus bringing with it many more headaches. This doesn’t have to be the case. The difference in the DNA of a chimpanzee and a human is only 2% but what a difference that makes. 2% one way and you are spending the rest of your life learning how to crack open a nut, 2% the other and you can fly a rocket to the moon. You may be surprised to find that the difference between a successful and an unsuccessful business is surprisingly similar.

So what is the DNA of profitability in a business?

Broadly speaking, there are five factors that we can look at to improve the profitability of a business. Let’s start to build these areas up one by one.

1. Leads: This is any realistic, potential customer to your business. Someone who might realistically buy from you.

2. Conversions: This is the percentage of leads who actually decide to buy from your business. They actually reach into their pockets and buy.

3. Average Sale: This is the average amount of money a customer spends with you whenever they buy something from you.

4. Transactions: This indicator is the average number of times in a recorded period (for example, a year) that a customer will purchase from you.

5. Margins: It is no use having a huge turnover and no profits. Therefore, this indicator is the net profit you achieve on your turnover.

Most business owners are aware of these concepts, but many cannot tell you what the data is for their businesses. I have found that simply measuring these elements on a consistent basis can increase the profits in a business and will always surprise a business owner who has not had the diligence of measuring them.

Having measured the factors, how can we get them working for our business?

Here is an example:

  Starting Point
Leads (1) 100
x  
Conversions (2) 25%
=  
New Customers 25
x  
Average Sales Value (3) £20,000
x  
Transactions (4) 1
x  
Turnover £500,000
=  
Net Margin (5) 20%
=  
Net Profits £100,000


The Power of Small Change!

If we now increase our 5 factors by 10%, let’s see where that takes us:

    Starting point   Plus 10%
Leads (1) 100 110
x    
Conversions (2) 25% 27.5%
=    
New Customers 25 30
x    
Average Sales Value (3) £20,000 £22,000
x    
Transactions (4) 1 1.1
=    
Turnover £500,000 £732,050
x    
Net Margin (%) 20% 22.00%
=    
Net Profits £100,000  £161,051

The 10% scenario represents an increase in net profit (money in your pocket) of £61,051. Not bad by anyone’s standards.

Work this out now for your business and see the potential results from the Power of Small Change.

That’s all well and good but my business is different!

Many business owners (normally those who can’t tell you what the above factors are for their business) say that it would not work for their business, but in reality I have never seen a business where some form of this won’t work. It is always possible. Here are a few points to remember:

• It doesn’t have to be expensive: Some business owners believe that it all has to be very expensive, that you have to spend considerable sums on advertising to get more leads. This is not the case. I have seen situations where the spend has actually gone down. The advertising was simply ineffective and not tested and measured. In today’s world of social media this is truer than ever.

• Test and Measure: You cannot change what you haven’t measured. If you know the return on investment for any form of marketing you know whether it is worthwhile continuing with it or not. If you don’t know the profit margin on a project how can you improve it the next time?

Surprisingly, whilst increased sales are normally good for business, often they are not.  Instead they can cause a myriad of other problems such as, increased overheads, cash flow problems and operational, HR or production issues.

It is always better to model the changes before you carry them out to see what the impact will be on your business and, indeed, your life.

Conclusion

The good news in all of this is that in order to dramatically improve the profits and cash flow in your business, sometimes it only requires a few tweaks and not a major overhaul. Contact your local Icon Advisor for a discussion on how this impacts yourself.

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