How To Increase Profits For Your Business

This blog post will teach you five different strategies to help increase the profits of your business. Learn how to increase the value of your product, improve your budgeting and financial analysis skills. Understand how to apply financial controls to mitigate fraud risk and financial loss.

R&D investments – evolve your product to increase value

One question that every entrepreneur and business owner should be asking themselves constantly is why are customers buying their product versus other competitors on the market? To answer this question, you will need to understand the value proposition of your product. i.e. in what way does your product offer value to your customer. It may help to ask the question what parts of your product do customers see value in and therefore result in a decision to buy? A good example of this can be seen in the motor vehicle industry, as the value proposition goes much further than the surface level of a need for a transportation solution. For example, a car manufacturer like Porsche is successful in providing value in so many levels. If you were to break them down, you may come up with many points of value including the following:

• Providing performance cars which are engaging and fun to drive.

• High standard of engineering built into their cars, built to last, as evidenced in the JD Power survey for reliability of the flagship 911 model.

• Design, both interior and exterior. The recognisable exterior is iconic for a German sports car whilst the interior is both comfortable and luxurious.

• Strong racing heritage in the brand, winning many races in motorsport including Le Mans. This gives the brand a strong emotional connection with buyers. Especially if the customers grew up seeing Porsche’s on the race track winning races.

• Status symbol, Porsche has a strong history in producing high performance luxury cars, which are not necessarily affordable by the average person. Therefore, Porsche has become a symbol of success and significance to many people.

In this example, you can see why Porsche is a very successful car manufacturer, as the company is providing value to its customers in many ways. This value is then translated into a high selling price for any Porsche model. Also, the value proposition of Porsche is delivered in such a way that it is hard to replicate for other car manufacturers especially new entrants into the luxury sports car market. This example demonstrates why every business needs more than one area where value is provided in their product. 

So how do you go about increasing your value offering? The most logical answer is to invest in Research and Development. Businesses like Dyson are a good example of this, in 2022 the company had a 5 year plan to invest £2.75bn over the period into research and development of new technology in fields of energy storage, AI, robotics, software and connectivity. Dyson is large company with access to a vast amount of resources, however when you compare this investment against the revenue for 2022 of £6.5bn the investment is significant. The innovation of Dyson’s products are one of many key value drivers for Dyson’s products. Even though the company is perhaps widely regarded as the best manufacturer of vacuum cleaners, with almost every middle class home in England owning one of their products. The company is still striving to improve their product through research and development. Secondly, research and development has no doubt allowed the company to enter new markets with related products. For example, Dyson hair products, benefit from the lithium batteries designed for vacuums.

So, what can we learn from Dyson? Research and Development is an area you should take seriously for your business. Even if you’re not in a fast-moving tech industry (some of the other potentially more traditional industries may benefit the most from a shakeup), markets are constantly changing as consumer demands are changing. If you don’t adapt and evolve your product you will miss out on the opportunities. The best entrepreneurs recognise these changes or sometimes create these changes in how they have been able to improve and enhance their product. Serving the market in a new way, researching, and developing new ways to deliver more value in your product is how to achieve this.

Budget but don’t over budget

Large corporations often spend weeks or even months going through every department, estimating income and expenses for the year usually based on expectations of growth for the business or levels of sales expected for the year ahead. Once the process has been concluded and all revenues and expenses have been estimated, the idea is that the business will then have an estimation of what profit should be made for the year ahead. This assumes that all department heads and managers will be able to deliver or stick to the budgeted numbers that they have provided.

This budgeted profit will be broken down by month so that actual results for the month can be compared to budgeted figures. This forms the basis of Month end Financial reporting for most large corporations. As the business will want to understand from their month end reporting how do the actual numbers or Profit & Loss account stack up vs the annual budget that they predicted. And based on these results what trajectory does it put the company on to achieve as financial results at the end of the year. The business may also review how sales are performing for a specific product vs budget, this then leading to investigation or actions to be taken to understand the causes and what can be done to improve sales. Also, for cost control the business can review all the actual spend in the expense categories vs budget. Identifying troubling overspends and taking appropriate action.

So, should you adopt the same budgeting approach for your business? Obsessing for months in putting together your best estimate of profit for the following year?  Unfortunately, your customer most likely does not care about your budget as it does not add any value to them as a customer. Therefore, if you are a new business or a growing business your time may be better spent focusing on ways to improve your product or service, adding more value for the customer. Or investing time in Sales or Marketing to improve sales. A rigid budget control is useful for a stable business or a large corporation as the focus shifts towards operational efficiency (often through a control of costs) rather than growth. However, for a small or growing business there should be some element of cost control, but it should not be the only focus. It is still worth preparing some sort of budget for the year ahead so that you can identify what level of profitability you should aim for as your business is growing. Also, this will help you to avoid the pitfalls many high growth businesses succumb to during the scale up phase. As during this phase there is so much focus on growth that costs can spiral out of control which can result in the company scaling up losses instead of scaling a sustainable and profitable business. Often businesses look to rationalise costs and improve operating efficiencies once they have already achieved growth. Why not use the budgeting process to keep your business operating efficiently while growth is happening and stay one step ahead. The process will help you control costs and identify areas for improvement, and most importantly what your trajectory is for the end of the year.

Instead of setting a budget for the whole year why not adopt a rolling budget. Using a rolling budget, you focus on budgeting an accurate 3 months and then for the remaining months you prepare a high level estimate. 3 months is arguably easier, quicker and potentially more accurate to budget, after all, it's easier to predict revenue and spend activity for 3 months than 12. Most finance professionals know that no matter how much work that goes into the annual budget process, the budget is wrong as soon as it is completed. Unless of course you have a crystal ball. So why spend so much time preparing a budget that is going to be inevitably wrong? Well, using the rolling forecast you can save time and focus on calculating a more accurate 3 months of budget. Then as each month goes by you can extend your more accurate budget by an extra month.

If you’re just starting out or considering an idea, to get a quick sense of the level of risk or potential profitability of the business why not prepare a breakeven point analysis. Breakeven analysis is simplistic as there is an assumption that costs can be categorised as fixed or variable (in reality costs can contain both elements). However, the analysis will give you quick idea of how many units you need to sell to cover your costs or how many units you will need to sell to achieve a desired profit. And therefore will your business have a fair chance of profitability or are the odds stacked against you? 

Don’t cut costs, cost optimise instead

Using a cost optimisation strategy, expenses incurred are reviewed for their efficiency and value added to the business. The goal being that costs which add value to the product or service that the customer recognises are reduced if possible, using the process mapping technique. Costs that add no value whatsoever are eliminated. Costs that are necessary to do business (not necessarily adding value to the customer) are reviewed to evaluate if the process could be improved and carried out more efficiently therefore reducing the cost. For example, digitalisation of a process may reduce costs as you will be moving away from manual non automated, possibly time consuming processes.

Using this strategy, you will need to review if the costs incurred are aligned with your business strategy. For example, if you operated in luxury goods, your delivery costs may be higher than if you were selling low cost goods. As the service needs to be aligned with your strategy, cutting costs on deliveries could result in poor service meaning you are moving away from your business strategy. Potentially not delivering value in areas that customers expect. Therefore, getting your goods to your customer on time with a high level of service is likely to be a cost that you will not want to reduce for your business. However, if you found a way to complete deliveries with your own staff providing the same level of service at a lower cost, you will have achieved a higher level of operating efficiency.

Another example could be if you outsourced a function within your business say the IT function, this may be performed at a lower cost if brought in house as your business grows. Also hiring resource internally may give you better control, as you can direct your staff how you wish focusing their attention on specific tasks and projects. However, there are other factors to consider such as level of service, flexibility or how critical this function is to your business and your customers. Therefore, using cost optimisation, you review the process and consider what alternative ways could the process work to achieve the required results. But also weighing up non financial considerations. You might think that you already applied this framework when you first setup the process and already identified the most cost effective and efficient method. Which may be true, however as your business grows and technology advances there are always new opportunities and new methods for the operations of your business. This is of paramount importance if you are planning to scale up and grow your business. If your business operations and processes are heavily reliant on manual time consuming processes, when growth comes you may find it difficult to scale up your business due to the burden of these manual processes.  

Identify KPIs which drive results

Setting up a dashboard of Key Performance Indicators (KPIs) can be very insightful to help you monitor and manage the performance of your business. It’s important to remember though that the older the information is the less useful it becomes. In addition to this if you are looking back at results-based metrics for periods that have already ended you are too late to improve the performance for that period. For example, if your KPIs are reviewing achieved gross profit, return on capital employed or reviewing your Profit & Loss account for a period that has ended, it’s too late to improve the performance for that period. The train has already left the station! Therefore, to create a useful KPI dashboard aim to identify and measure KPIs which contribute and drive your desired outcome or objective for your business. For example, if you were running a restaurant and your goal was to be profitable you may want to measure the following:

Daily sales, you should have an idea of what your daily revenue needs to be to break even or achieve your desired profit. Of course, with restaurants the sales tend to rise as the week progresses, peaking on the weekends to then fall back at the beginning of the week. Therefore, when reviewing revenue, you would need to compare it versus a like for like (i.e Tuesday sales vs same day for previous week) day rather than the previous day.

Average daily order value, to help increase revenue per cover (available table). It would not support your profitability objectives if your average customer took up a table for 1 – 2 hours and spends only a minimal amount. If the average order value is low, you may want to train your staff on their upselling skills. Or review your offerings to see where improvements can be made to drive sales of the higher margin items. Also, your staff should be aware of the high margin offerings and be targeting these in their sales.

Daily wastage % or levels of waste, as high wastage will reduce gross profit. Therefore, to be profitable you will want to keep control of this figure. High wastage may indicate further training required for staff if wastage is created through food preparation or poor planning for the ordering of raw ingredient purchases. Perhaps over forecasting demand.

These are just some KPIs that I have setup in the past to monitor performance while managing the performance of a restaurant group with six sites. The KPIs will depend on what you are trying to achieve with your business and your chosen strategy. For example, tech companies may measure customer acquisition costs, lifetime value of customers. The idea being that if your acquisition costs are lower than your lifetime value of the customer you should be on the path to profitability.

Internal controls to reduce loss and protect profits

Internal controls are processes and systems that you follow to reduce risk of financial loss. Any business that you carry out there is a risk of financial loss through fraudulent activities, especially as your business grows or when you hire staff.

The following are some examples of controls that you might want to consider for your business.

Segregation of duties

One of the most common weaknesses I see with small businesses is the lack of separation of tasks, or what accountants and auditors call segregation of duties. The idea being that if you give any one person too much power or authorisation to perform tasks, they may have the opportunity to commit fraud. For example, some small businesses allow their bookkeeper or person maintaining the accounting records, reconciling the bank account etc to make or authorise bank payments as well. Allowing this is very risky. As this person could make a fraudulent payment, then disguise this payment as an expense in a profit and loss general ledger account which has lots of activity or an account that is not reviewed often therefore not raising any suspicion. Any good bookkeeper would be able to identify accounts of this nature. If you don’t pick up on this fraud, it’s unlikely that your accountant would either. If you are using an accountant to prepare annual statutory accounts to be filed with Companies House (in the UK) to deal with your taxes etc, the likely procedure is that the accountant takes your trial balance (totals for all income and expense accounts and closing balances for the balance sheet accounts) for the period and presents the numbers in a statutory accounts format. They may do some additional work such as ensuring that the balance sheet accounts agree to reconciliations and therefore look reasonable. However, when it comes to analysis of the P&L quite often, they won’t do any more than a high-level variance review. This could mean reviewing the P&L versus prior year, looking to see if margins are consistent. They may even raise questions to you if margins look lower. From my 8 years of experience working in an accountancy practice, I can say for certain that your accountant will not review all the entries in the expense accounts, ensuring that they reconcile to valid supplier invoices. They may not explain to you that doing further work of this nature would be considered an audit. If you’re not paying your accountant for an audit, do not expect them to go into this level of detail. Even if they were undertaking an audit, do not expect the accountant or auditor to test every line of expense going through your P&L. Also, auditors are paid to give an opinion on whether the accounts are materially correct. If the fraud is below the auditor’s materiality threshold, do not expect them to pick up on it. If you are still not convinced, have a read through the engagement letter that your accountant should have issued to you before providing services.  

Reconcile your sales to ensure completeness

If all your sales are going through a Point of Sale system (POS), it is a good control to run a daily or weekly report from your POS to ensure that all sales have been paid for. Checking the report back to your bank or cash receipts, investigating any discrepancies. This will help you ensure that your receipts are complete. Of course, you will need to ensure that all employees are putting all sales through the POS. As with many business controls, it is also good practice to ensure that this reconciliation is performed by someone not involved in the processing of the orders or responsible for safeguarding the cash. Ensuring that you are not providing an opportunity for them to cover up any discrepancies.

Reconcile your bank account

Bank reconciliations are an important process of control for a business, the process involves analysing all bank transactions from the bank statement. Then allocating payments and receipts accordingly in your general ledger, the result should be that your bank balance per your accounting system will agree to the statement balance. What’s useful about this process is that it helps you to monitor transactions coming in and out of the bank. Therefore, if you spot any suspicious activity, it’s more useful to pick up on this as soon as possible to take action, rather than leaving the bank unreconciled all year until your accountant or bookkeeper picks up the reconciliation. The more time that passes after a fraudulent transaction, the less you will be able to do.

Verify your purchases

Larger businesses tend to adopt a three-way matching process for making supplier payments. This means that before approving a supplier payment there must be a matching purchase order, goods received note and purchase invoice. This ensures that the business is paying for the goods or services that were ordered, the price is correct as it should match to the ordered price. And lastly the goods or services have been delivered. This can be difficult to implement for a small business as it requires you to operate a purchase ordering system together with matching and dealing with discrepancies on invoiced amounts. Although there are systems that will help you automate this process. For a startup or smaller business instead of completing a three way matching process you may just check before making any payments to suppliers that you have all copies of invoices, goods or services were delivered with no issues and that the invoice value amounts were what you agreed. If you are applying a cash accounting method of accounting (i.e calculating total income and expenses for the year from your bank statements) you may also want to go through the payments on your bank statements, ensuring that you have invoices for all payments for the year.

Understand your numbers

As a business owner it is worth making an effort to understand the financials and financial reporting for your business. Many business owners without financial backgrounds rely too much on their accountant who often is an external adviser to explain the numbers to them. But if you are relying on an adviser to analyse and explain your Profit & Loss account, you may miss out on identifying trends developing in your business such as a deterioration of gross profit margin. Understanding the story behind the numbers is important for you to understand the drivers behind the performance. If the performance of your business is falling and you can’t explain it, you should investigate further into the numbers to understand the causes. If you expect your accountant to do this on an annual basis you may be disappointed. As mentioned before if you are paying your accountant to complete your tax return or end of year statutory accounts, don’t expect them to analyse the performance of your business and make recommendations on how to improve. As the core service that they are providing is compliance for taxation. They may provide a high-level review of performance as part of their service, but the reality is that no one should know or care more about the development, opportunities, and risks that your business faces than yourself.