Growing Profit: Business 101
Do you ever feel you’re inundated with people demanding you chase the latest fad to increase sales? Unfortunately, many fads or advertised tactics are not “one-size fits-all.” Each business is uniquely defined by the market and demographics it serves, and their strategies should differ. What works for a product based store in Seattle may not work for a service company in Clearwater, and vice versa.
While tactics may differ across businesses, there is commonality in the principles of making more money.
One fact that holds true no matter what business you operate - there are only two ways to expand profit.
To explain further, we’ll be talking levers today. Like the rigging or sails on a boat, business levers are the strings available to entrepreneurs that steer the direction of our businesses.
Before you worry about marketing, social media, or the latest trends, revert back to basics. Are your actions driving the most profit for the least amount of effort? Or is it simply a distraction?
Breaking Down Profit: the Two Levers
Let’s go back to the classroom for a minute; profit is simply defined as revenue minus costs.
Profit (P) = Revenue (R) - Cost (C)
When you think about it in these terms, you’ll notice there are only two levers to grow profit. You can:
Increase revenue; or,
Decrease costs
Simple enough in theory, right? We’ll dive into implementation in a later post, but understanding this simple concept makes strategic prioritization that much easier.
Once you understand the basic levers available to you as a business leader (revenue and costs), you can combine strategies that will grow the most profits and best fit YOUR business.
Why? Because every decision (even the super small ones), should point back to your profit goal, revenue / cost levers and help steer your business to success.
Revenue Levers
Simplified, revenue has two levers you can work with. To increase revenue you can:
Increase volume (i.e. sell more); and/or
Increase rate (i.e. charge more)
We’ve broken down examples in the image below.
Cost Levers
When someone says “grow profits,” our first thought is often to increase sales. Yet costs are just as powerful (if not more), in driving profit. Without cost discipline, we risk constantly recreating the proverbial wheel because we’re in search of an endless supply of customers (which isn’t possible, nor realistic).
Expenses are not inherently a bad thing, but it’s important every expense incurred points back to revenue generation and lead generation. If not, that expense can probably be eliminated. Most businesses will have costs broken out between fixed and variable expenses. Fixed will most likely be your rent or mortgage while variable expenses like cost of goods sold will change each month (see table below for examples).
While you can reduce fixed expenses like negotiating cheaper rent or changing store locations, these typically are much more difficult to capture quick cost savings. Variable expenses tend to be a better place to target for discretionary spending, but if you’re growing revenue through volume you should also expect increased variable costs.
Implementation
Think about your goals for the year. What’s your profit goal you want to hit? Which levers will you pull to start reaching your goals? Will you hit that goal through revenue strategies, cost cutting, or a combination of both? What percentage will come from revenue or costs?
Once you know which levers you’re pulling (whether you’ll increase your revenue or decrease your costs), you can start to define the how. Well cover that in a later post.
Do you have any questions about profit? Which levers do you find most effective for your business?