Having a profitable business right now is the first step to achieve and sustain profitable business growth.
Often business owners feel they need to increase sales, to increase cash so their business becomes more profitable.
Yes, it may become more profitable, however there’s a little known fact about long term business growth you also need to be mindful of.
The majority of businesses drop in Net Profit Margin (percentage Net Profit on Revenue) each year as revenue increases.
This simple diagram shows it…
Both revenue and net profit may increase each year, but not proportionally, so the net profit margin is actually decreasing in many businesses.
What that means is, the business has less cash reserves proportional to revenue, so instead of the cash level in the bank constantly increasing, it increases slower by a small amount, stays about the same, or may even decrease.
Is your business suffering from a decreasing net profit margin?
Is the figure decreasing each year, or increasing? Right now is a good time to find out.
Have you found that even though your sales and revenue are increasing each year, there just doesn’t seem to be a lot of surplus cash and you’re not seeing higher levels of cash in the bank?
If so, you’re like the majority of business owners, not in a minority.
The decrease in Net Profit Margin happens very slowly, and even though Net Profit can be increasing, the Net Profit Margin can be decreasing.
The First Step to Profitable Growth
Check your Net Profit Margin figure for the last financial year.
Is your revenue over $700,000? If so, is your Net Profit Margin over 15%?
Work it out by dividing the net profit into the revenue and then multiply it by 100. That will give you the Net Profit Margin.
If your revenue is under $600,000 and the lower it is, the higher the Net Profit should and will be.
At $100,000 it may be as high as 50%. At $400,000 it may be 30%.
The key is to take it as high as you can, because that means you’ll have more cash in the bank – all things being equal.
To raise the figure, the number one factor that influences it is your pricing.
What mark-up you add to your Cost of Sales (materials, products and technical employee wages) determines the Gross Margin.
Gross Margin directly influences Net Profit Margin.
If your mark-up is 30% then your Gross Margin is 23%. What you make is margin, not mark-up.
Look at the Total Expenses of your business figure. Then divide that into the Revenue and multiple by 100. That’s the percentage of Expenses your business operates with.
If its say 20%, then with a 23% Gross Margin the Net Profit Margin will be 23% – 20% or 3%. That’s based on this simple equation for profit…
Gross Profit – Expenses = Net Profit
If you make these figures percentages it’s exactly the same.
So the first key to making your business more profitable (and sustainable) is to understand that equation and identify the minimum Gross Margin you need to sell anything at.
That’s not hard to do. Simply calculate the Expenses percentage of Revenue for the previous financial year.
If its 10%, then a 30% Gross Margin will give you a 20% Net Profit Margin. It’s just a matter of using the equation…
Gross Margin – Expenses % = Net Profit Margin.
Once you’ve calculated the minimum Gross Margin sale prices, then you need to watch the figure to see if its been obtained with all jobs.
Every 6 months generate a Profit and Loss Statement and check the figures for your Expenses as a percentage of Revenue again. See if its changed.
If its lower, that’s good. That means your Net Profit Margin will be higher, if your Gross Margin stays the same.
Checking what percentage your minimum gross margin sales price is every 6 months is good (and essential management practice).
Its all too easy to let Gross Margins drop due to increases materials costs or freight costs etc. Keep an eye on your Gross Margins and Expenses percentage and then you’ll maintain the profitability of your business.
This whole topic can feel a bit overwhelming. Its quite technical and detailed, but this topic is the most important one to understand and invest your time in because your long term, profitable business success hinges on it.
Being in control of your profitability by understanding and tracking your Gross and Net Profit Margin is the number one key to sustainability.
Growing your business faster, once its profitable is stage two.
How to Grow Your Business
First of all, be very aware that there are other effective ways to grow your business, apart from just lead generation.
In fact, if you’d like to see higher profit margins, you’d be wise to consider all the ways to grow your business.
Here are the 6 ways to grow a business…
- Increase Leads
- Decrease Lead to Quote Conversion Rates
- Increase Quote to Sale Conversion Rates
- Increase the Average Dollar Sale
- Raise Prices
- Increasing Buying Frequency/Client Retention
Just to explain the second one, that’s relevant where a business spends time to do a quote, for example at a prospects’ premises that they need to visit to work out the price, or in any business that needs say 30 minutes or more to work out the price for a prospect.
Time is money and wasting time on quotes in a business means the Lead to Quote figure needs to be decreased.
Point 6 – the buying frequency is relevant where customers buy more than once per year from your business. In that case, the important question is; are they always buying as often as they can be, or do they not buy when they could or should?
Before you can increase any of these figures, you need to work out what they are in your business.
Do you measure how many leads are generated by your marketing every week? If not, its recommended to start tracking to find out.
Measuring is essential for sustained, profitable business growth
Want less stress from your business? Measuring, all figures and also the performance of employees is the key.
Ignorance is actually the number one cause of stress in a business. Know your numbers and then you can act on them if needed.
Finding out too late you don’t have enough sales/jobs, or customers haven’t paid on time are examples of the primary cause of stress being ignorance.
Knowing your conversion rate from Lead to Sale and Quote to Sale is essential too. Why?
Because there are dozens of ways to increase these figures and its very motivating to apply a strategy and see it improve in one week.
And if lead or quote to sale conversion rates increased by 20%, so will your income. A 20% increase in sales conversion rates and income has been achieved dozens of times in client businesses in one week.
Would it excite you to see your income jump 20% in a week or month? That’s more than most businesses in a whole year.
When you improve the figures for one or more of the above 6 ways, you’ll start to see a multiplying effect on your revenue and net profit.
Example Effective Strategies Nearly Any Business Can Use
When it comes to lead generation, you can increase leads through your website by simply making it more “Google friendly.”
What that means is make your website more attractive and interesting to visitors when they land on it.
One of a few ways is to ensure you have 400+ words on every page.
People are doubtful about buying from any new business. They need reassurance, to build trust in the business. Having 50 words on a page won’t tell them anything or reassure anyone, even if the page is full of image/s.
Having less than 400 words on a page won’t reassure visitors you’re a trustworthy business.
You need those words for people to ‘read between the lines’ about the pride you have in your business, and the dedication to quality standards in the process of carrying out your work for them.
The less words on a page and the shorter the time a person will spend on it and Time On Page is a Google ranking factor!
If people keep landing on your website and leave it soon after, without clicking on a link to go to another page, both your Bounce Rate and Time On Page will be low and your rank in search results will be dropping.
That’s one example tip to increase traffic and leads.
Another is to use a photo of happy people as the first image seen on the home page.
Its statistically proven to be the most effective image you can use with marketing of any visual kind.
People want to know you’re a customer service/people orientated company and that type of image will show that. This also keeps people longer in your site, which helps with traffic.
Conversion rate strategy
Change how you greet people on the incoming phone call.
I’ll bet you’ve phoned a company and felt like hanging up after hearing the greeting from the person.
Is your way of answering phones in your business a little or a lot better?
Is it the best it can be?
The most effective words – tested with hundreds of businesses for over 18 years, for answering the phone have been these…
Thank you for calling (Business name), this is (first name).
That’s it, just that. Don’t add “speaking” at the end, it lowers the authority of the person.
Try it (practice out loud first), but make sure you are melodious with saying the words because ‘mono-logging’ the words with a flat tone of voice certainly won’t work better than your current phone greeting.
You’ll find people think your team are intelligent by using these words, an authority person who can help them, and they will want to talk to you, not try to bypass you to talk to another person.
Average Dollar Sale Strategy
Every customer doesn’t know what they don’t know about your business’ services. With that in mind its important not to assume they aren’t interested in more than just one thing.
People will ask questions about what they know, but can’t about anything they don’t know.
You can use your customers ignorance to your advantage by asking one simple question, “Do you know about…? The reason I ask is because a lot of our customers are when we tell them a bit about it?”
That’s all you need to say. Try this out and you’ll probably be surprised how many people are interested in knowing more.
Price Rise Strategy
There are numerous ways to raise your prices.
One is the “Nike” way. This is to just do it by 5% to 10% on everything immediately.
This way is not for everyone, obviously.
Another is, wait until you’re super busy with too many sales. This works great because you have too much work, so why not price rise to take advantage of that?
Another is to introduce a price rise in combination with another strategy.
Over the years clients have asked for sales training of their admin and estimators, which was a great time to introduce a price rise. It’s also advisable because sales training has jumped many businesses sales income by 20% immediately, which means 20% more labour hours are required.
That’s a LOT to manage immediately.
The simplest, yet rarely used, is to send out weekly ‘news’ letters to every previous client.
It’s easy to obtain their email as you have everything else. Why not use it?
Not keeping in touch with past customers is a sign you don’t care too much about them. They then stop thinking about you and next time they need to buy from your industry, they don’t buy from the businesses they purchased from before – proven to be as high as 67% of the time, because they received satisfactory service and no follow ups.
Forgot your clients and they will forget your business. Keep in touch for free, after the sale and they will remember you and refer friends to you.
The Most Important Ingredient for Sustainable Success
Have you ever put a dollar value on your state of mind?
It definitely has a tangible value because without you being able to work right now this week or month, where would your business be?
Your state of mind can hinder or enhance your business growth and over decades it was seen that the number of hours a business owner worked, directly influenced the long term success of their business.
When you work beyond 40 hours, and even thinking about your business at home at night, mornings or weekends is still ‘working’, then you’re going to start hindering the growth of your business.
What happens beyond the 40 hour mark is that all one becomes stale and gets into micro-improvement thinking.
Micro improvements are tiny ones that make no real difference to the business at all. It’s things like…
- Ringing a customer back that you should have
- Sending an invoice
- Calling a supplier about something you will need
- Paying an invoice
You can see that not one of these will increase the income of the business in 6 months.
These micro improvements happen because of the head full of ‘stuff‘ – for the sake of name – that happens from working too many hours.
The key to growing a business by 20% to 300% in a year is to stay fresh towards our businesses.
With a complete break away from a business, on weekends, with no thought about it at all, when one comes back into the business on Monday they feel fresh and can ‘see’ – with their mind more clearly what the business needs in a macro improvement way.
Macro improvements are actions such as…
- Kicking off a new Google Ads campaign
- Engaging a business mentor to discuss a rapid improvement in your business
- Running an ad to hire that new employee your business needs
- Getting that new, overdue website underway
If you compare the two lists, the difference is obvious between micro and macro improvements in terms of measurable results.
Look back now for 3 months or 6 at your own business and ask yourself how many macro improvements have been implemented?
What significant, measurable, financial improvement have you seen in your business in the last 6 months?
The key to being able to actually implement a macro strategy, that can potentially increase your business profits by 50% in 6 to 12 months is to first of all indulge in macro thoughts.
Simply stop running a constant busyness (if you do) working hard, long hours.
Make a decision based on your own evidence that working long hours (40+) doesn’t actually prove beneficial, because if it did you wouldn’t still be doing so if you have for years.
Work SMART by seeing the macro improvement opportunities your business definitely has by taking a longer mental break away from your business.
Want me to talk to you about how prove it with you?
Book in for a Breakthrough Meeting and I’ll identify the exact 5 to 10 strategies you can implement to increase your business profits by 50% in 3 to 12 months.
If you saw all the businesses this has already been achieved with, in service, manufacturing, wholesale, retail and even importing businesses, and how BIG some of those growth results have been in just months, you’d know its not an empty claim.
Be smart, have a macro breakthrough meeting. You’re certain to gain new ideas if nothing else, so its a good investment of your time.