There is no doubt that the downturn in the economic climate has adversely affected the revenue generated by most businesses.

To continue to survive in the current climate and prosper longer term, businesses will need to focus on profitability. The saying “turnover for vanity, profit for sanity” has never been truer.

In order to maximise profits, business owners must first understand what determines profitability.

In the simplest of models, profitability will be a function of the income generated from the trading activity of the business (revenue and direct costs) and general administrative expenses (overheads) that the company suffers.

It is important to break the business model down into the categories above and look at ways to tweak or fine tune the constituent parts of each category.

Invariably, short term wins and increases in profitability can be achieved by cutting costs, however more significant increases in profitability and longer term sustained growth will ultimately come from an increase in trading activities.

Considerations for maximising profits:

Trading Activities

• Consider pricing - Any increase in sales prices can potentially increase revenue and ultimately profits, (as long as any lost customers are smaller in proportion than the increase in price). Conversely, profits can also increase if a price reduction stimulates sufficient additional sales. The key is to understand how sensitive your customers are to price, as getting the pricing right, can have a marked impact on revenue. Every business should have a policy for regular price reviews, as customers will be less likely to object to small regular increases (annually as a minimum), than larger less frequent rises.
• Review returns made per customer – All businesses will have good customers and bad customers, with the 80/20 rule holding firm for most cases. Review your customer list and identify those that you really want to work with and those that you fail to make an adequate return on. Investing time and resource in the good customers and cleansing your client base of those whom you actually lose money on is an effective way to increase profits.
• Review direct costs and processes - Identify if any savings can be made to increase margins. Savings may be evident by revisiting relationships with suppliers to see if you can buy cheaper or whether alternative suppliers or materials are possible. By looking at the processes involved in producing your product or providing your service, it may be possible to identify areas where efficiency can be increased.
• Revisit marketing strategy – A marketing plan is essential and this should answer some key questions. Have you identified your target market? What actions are you taking to deliver your message to the market? What marketing channels are being used?
• Understand your offering – As part of the development of a marketing strategy, it is important to understand where you sit in the market place. What are you offering and what are your competitors offering? What is unique about your offering? Are you competing solely on price or is there sufficient differentiation from your competitors to allow you to avoid competing on price?

Overheads

Short term wins can be quite easily identified by reviewing overhead levels;

• Staff costs are often the largest overhead. Are staffing levels lean?
• Speak with suppliers to discuss whether there are any discounts available
• Don’t be scared to shop around. Buying decisions should not all be about the cheapest, but   value for money. What fits best with your requirements?
• Assess property costs – there are often savings to be had in terms of rate reviews and possible energy costs. A utility audit can now be undertaken by third parties which should yield cost savings. Such exercises can often be undertaken on a contingent fee basis, ensuring no cost to the business other than a percentage of the costs ultimately saved.

It is worthwhile noting that taxation will also play a part. The profits that a company makes will ultimately suffer tax. Tax planning is something to be considered to ensure that once profits have been maximised, no more than is necessary is lost to the tax man. Simple tax planning is all about ensuring structure is efficient, a clear strategy is in place and that there is careful consideration of timing and recognition of income and expenditure.

A word of caution: profit does not equal cash. We see many businesses that are profitable and yet still struggle regularly to meet and settle liabilities as they fall due.

Reviewing the business strategy for profit maximisation should be conducted as part of the overall development of a business plan, which must also consider cash flow and funding.