If you search online for advice about increasing profit in your business, and you will find many, many lists of individual things to work on. Lead conversion strategy, innovation, networking, revenue streams, employee satisfaction, customer retention… there’s a lot to take your attention. While these are all important ingredients of a healthy business, taking a step back and looking at the bigger picture is a valuable exercise.
What would you say if I told you there’s a way to drive profit in the business that requires just a few hours to implement and at most one hour a month to carry out? What’s more, it relies on information your business is already generating and won’t involve any major changes in your day-to-day. Interested? Let’s go through the four easy elements of my strategy.
1. Get familiar with your financial reports and what they really mean
To be truly successful, a strategy must have buy-in from the very top of the company. As the owner or key director of the business, you must instigate this strategy and then ensure it is carried out. What I’m describing in this blog doesn’t require lots of extra work but rather the adoption of simple, actionable, and repeatable habits that will get you thinking differently about your company’s financial health.
Too many owners don’t look at the numbers in the business. They take today’s bank balance as an indicator of whether things are good or bad, but don’t really dig much deeper. My first recommendation, therefore, is to teach yourself to care about the numbers. They are not abstract concepts in your Xero reports, they are very real. Once you start thinking about your business through the numbers, things will start connecting in very concrete ways. For example, if you make a bit more profit this year, that is cold hard cash in the bank that you can invest in a project that will improve next year’s profit, and so on.
Book some time with an expert who can show you how to interpret the numbers in your business. You’ll start to see where one number is influenced by another number, where there is potential for change, and what success might look like. You should understand how to access and interpret the reports in your accounting report, so set aside a small budget to regularly upskill (something like €500 per person per year is affordable and will have a significant effect).
Every business should have a plan. To guide your profit strategy, you’ll want to develop a plan for the coming 12 months. Once you have the plan, you can set goals for different areas of the business. There are non-financial profit drivers such as productivity, quality, culture, and expertise as well as financial profit drivers, which is what we’re looking at here.
2. Identify who is responsible for the different profit drivers in the business
Who is responsible for profit in your company? It’s a question rarely asked, but I believe every business owner should consider this. Why? Because profit is the result of other factors; you can’t control it in a vacuum. Profit is the point of business, after all. And if we are making a profit, we have a sustainable business.
Unless you are a company of one, it cannot be on you to deliver on all the different profit drivers. It absolutely should be the responsibility of the person in charge of that area of the business. This means the managing director should be primarily preoccupied with overheads, the sales manager is responsible for sales, the operations manager is responsible service or product delivery (such as people costs), etc.
However, you should not give people a target that they can’t influence. For example, I’ve seen plenty of companies link management bonuses to overall annual profit. But what happens when the business is doing so well that the owner decides to take a large chunk of the would-be profit to reinvest in the business? Suddenly that profit has shrunk dramatically, and the expectation of a bonus with it. For this to work well, targets must be things that the person has real control over.
Another thing that can be hard to get right is timeframes. The more junior the level, the shorter the timeframe needs to be between performance and reward. If you’re setting job targets for a junior employee, timeframes like today vs yesterday work well. For a mid-level employee, the timeframe might be last week vs this week. The senior people we are talking about here should be reporting on monthly timeframes. Ideally, you will have associated an incentive with their monthly targets. Typically, the targets are reported monthly, and the incentive is given quarterly.
3. Develop a hands-on strategy for reporting on the key drivers of profit
As I said above, the best way to get this started is to spend a little time with a consultant or accountant to get your reporting tailored to your business. There’s no need for new or expensive tools, you can do all this in Xero. Your 12-month business plan guides what your targets should be, and you’ll set these up in your monthly budgets so that you can easily run a monthly report comparing planned performance to actual performance.
Now simply make sure that the right people are looking at this report at the right times. In a small business, this will be monthly and quarterly meeting. Discuss the results (some will be better and some worse) and take learnings from what has happened to better influence results in the future. I’m a huge proponent of reporting as close to the period end as possible. If you are following my tips for real-time accounting, there’s no reason a monthly report can’t be ready within two or three days of the month-end. If you need your bookkeeper to close the month off, this may be more like five to 10 days after month-end.
When you look at reports just after the period has ended, there’s a real relevancy and freshness to the numbers that is genuinely exciting – even for the non-accountants in the room! There’s a sense of accomplishment and confirmation of work done that will make this exercise a core tool for the business. But leave it too long and people will have mentally moved on. They’ll be into the current month and that is where they will feel engaged. Real-time accounting really does drive performance.
4. Focus on the two key areas of the business that truly drive profit
Before you start panicking about how you’ll find time to work on all the items in your chart of accounts, remember to think about that interconnectedness that I talked about at the beginning of this blog. The two main areas that will affect your profit and therefore require your attention at the monthly meeting are sales and gross profit.
Gross profit is your sales revenue less the cost of delivering those sales (that cost involves people, goods, etc.). The relationship between sales and cost of sales is simple but important in a business. Factors such as discounting, margin calculations, wastage, currency fluctuations, and delivery charges change the gross margin and therefore your target.
Overheads are important, but they are very predictable and should not jump up and down from month to month. This area is your responsibility as the owner or director. When making your 12-month business plan, you will have already established that the overheads are proportionate for the business and allow for profit. You should have already done what you can to get good value or favourable terms, and keeping these costs under control is part of your day-to-day.
Overheads include things like rent, insurance, rates, and electricity. You may have six or seven categories of overheads (for example, ‘premises costs’ could include lighting, heating, and cleaning) rather than seeing every single type of expense in detail. Having been set for the year, there won’t be targets to hit here, you will simply check that there has been no dramatic change from the predicted cost.
Running the monthly numbers is now as easy as one, two, three, four
So now you have your system set up to produce monthly reports and you’ve given key people in the business their targets. Once a month, your core senior team takes half an hour to review these numbers and see where the business is. If your sales numbers are there and you’re getting the gross margin you aimed for, by default your net margin, or net profit, will be exactly where you had planned. It really can be as simple as that.
This is a habit you can form with minimum effort, but you must be engaged in the process and commit to doing it. For a micro or small business, some coaching and advice from an accountant will get you up and running. Companies turning over more than a couple of million euros a year should be engaged with a management accountant or fractional CFO, who will help to organise the budgeting and reporting.
