Instant Profits Strategy

In this bonus lesson we investigate a highly leveraged strategy to unleash hidden profit in your business.

Consider two (2) businesses, Business A and Business B. They each have similar income, expense and profit.

To attain the goal of increasing profit from $10 to $13 (30%), the owners of Business A decide that their strategy is to increase revenue from $100 to $125 (25%).

This is the default mentality of most business owners – increase “profit” by increasing “revenue.”

Business A achieves this by implementing strategies such as ramping up advertising, adding sales team members, rebuilding their website, designing new brochures, etc.

The owners of Business B however take a different strategy. They take a long hard, critical look at all their expenses. They eliminate waste and improve the efficiency of their systems (and team members).

In doing so, Business B was able to increase its profits by 30% by reducing costs by 3.5%, without growing revenues.

Let’s look at this another way.

With a profit margin of 10%, every dollar reduction in expenses equates to a $10 increase in revenue without having to find, close and deliver on extra sales.

Now that’s serious leverage!

If your expenses are 90% of revenue, which they are for most small to medium businesses, if you eliminate 11% of your expenses your profits DOUBLE.

If your expenses are 85% of revenue, by reducing expenses by 10%, your profits increase by 57%.

We are yet to identify a business that operates at maximum capital efficiency – i.e. a business that can not find at least a 10% reduction in expenses for the same revenue/output.

Another benefit of this strategy is that cost reduction can occur in a 30 to 60 day cycle. You can experience the benefits almost immediately; whereas strategies to grow your top line can take 6 to 12 months to provide a return.

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Actions

1. Print out your current Profit & Loss and Accounts Payable reports and your credit card statement.
2. Calculate 10% of your Expense line items. This is your target saving.
3. Go line by line through each statement. With a red pen, write “P” next to expenses that directly generate (P)rofit; “R” next to any expense that while necessary, can be (R)eplaced with a less expensive alternate; or “U” next to any expense that is (U)necessary for delivering your product or service.
4. Extract a staff list in excel, including annual wages. Filter staff by importance (most important at top).
5. Tally all unnecessary expenses, including savings in wages. If you can save 50% of a wage – i.e. you don’t need a full time employee to complete the work, add that saving.
6. Repeat until you have identified a minimum 10% saving.

Note: Cost cutting, particularly wages, can be difficult. Keep in mind that expenses are like a gas – they expand to consume the space they are in. Business expenses tend to expand to consume revenue. And you – as the business owner – is the one that suffers. It’s time to prioritise your profit and take control of your expenses.

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