When I help owners increase business profitability, we set targets in the order of forty to sixty percent more profit, together with positive cash flow outcomes. Neither of these outcomes is possible if you plan for improvement begins by trying to win more work. The most common reaction to this message is a shake of the head in disbelief. So, I best explain myself. Paramount Electrical has annual sales of $1.2 million, variable costs of $840,000, fixed costs of $216,000 and a profit of $144,000. The average value of jobs done by the business is $2,315 and 518 jobs were completed in the year under review.
To increase profit by 60% or $86,400, by winning more work, means the business must generate additional sales of $720,000 and complete 829 jobs. Imagine the headaches such growth would cause. More customers, complaints, staff, errors, sick days, quotes, time wasters, sales agents, the list is endless.
Then there are the additional costs, more wages, vans, tools, equipment, administrative support, advertising, telephones, computers, stock, workshop capacity, bad debts and more money tied up in Accounts Receivable. The costs must be met before income is received placing a massive strain on cash reserves, the outcome for a growing business is less cash not more cash.
And this is the reason small businesses don’t grow.
It is why owners initially think I am crazy when I suggest targets for profit improvement of 60%. They know it is not possible, they might not understand why it is not possible, they just know, from experience, it can’t be done.
But it can be done if your starting point is somewhere other than attempting to grow sales volume.
Guess what? Every business owner I have worked with, not most – every business owner, when I first meet them, are trying to grow sales volume.
What they discover, after working with me, is growth comes a lot easier when you first increase the profit generated by existing sales volume, and then grow sales. When you take this approach, a profit improvement of 60%, and positive cash flow outcomes are achievable.
I have written a book outlining the four steps necessary to achieve this result. The book will take you about eight minutes to read. You can obtain a free copy here.