Since setting up my first business, I have been concerned with increasing my company sales. A sale is the exchange of a commodity or services in return for money or the action of selling something. After advising many businesses I realised that having customers and selling to them is the only way to keep your business door open. Otherwise, the business profitability is even more important than sales. In terms of how much the company owners can take out for themselves (technically known as dividends), it is better to have a small company which makes a profit rather than having a big company with no profit whatsoever. You could argue that the value of a big company is higher than the small company but most of the time it is very difficult to sell a company that does not make a profit.
Before I explain the best ways to increase your company profitability I will briefly explain how the term profit is calculated. The formula is very simple:
= Profit before tax
(-) Corporation tax
= Profit after tax
If you look at the formula above you can see that profit is the result of your company total sales minus your company total costs minus your company expenses. There is also a difference between profit before tax and profit after tax. You must not forget that your company should also pay corporation tax to the government. In the UK, it is currently 20% of the company profit (2015 figure). For this reason you can never cash all the profit out of the business to yourself in the form of dividends. Some business people cash as much money out as they can during the year and when it comes the time to pay the company corporation tax, the company is suffering from lack of money. Please avoid this situation at all times.
Now that I have briefly explained to you how to calculate profitability, I will also explain the main ways to increase company profitability.
The main ways to increase profitability are to:
1) Increase sales
2) Reduce costs
3) Reduce expenses
4) Reduce corporation tax
1) INCREASE SALES
Never stop investing in marketing
It is surprising to meet so many business people who believe that marketing is a business expense. From an accountancy point of view they are correct. However, having a very good marketing initiative is the only way your company will have clients. You should always think about new marketing methods that can be applied to bring new customers. Forget about bad marketing experiences. You also need to understand that you should always measure how much money you spend in each initiative and what is the marketing initiative return of each one. Please do not rely on only one marketing initiative. You should spread your marketing budget in as many marketing initiatives as possible and then analytically select the ones that bring the best results.
Retained customers versus new customers
I am sure you have already heard the phrase “It is 10 times cheaper to maintain a customer than to get a new customer”. I’m not sure how the figure 10 was calculated but from my experience, retaining a client is cheaper than getting a new client. Otherwise, in order to retain your clients you must keep them happy. To keep than happy means that you should always put your customer first. When was the last time you called your client to ask them how were they doing? If you are the kind of business owner who only talks to your customers when you have something to sell to them, I am here to tell you that the time to close your business is coming.
For example, if you are a small business, one of the reasons people are doing business with you is the fact that they are unsatisfied with the big company automatic customer experience. It can be frustrating dealing with big companies; pressing various buttons on the telephone, waiting in a queue and speaking to a stranger about your issues. Be sure to provide to your clients with a high quality, bespoke service. If you only do this, your chances to succeed will increase a lot.
Always have a premier product or service
Have you seen how many companies have a standard product or services and a premier one? Have you ever wondered what the reason was behind this initiative?
The reason is that you can always add an extra benefit or feature to your standard product or service in order to add extra value. Adding extra value means that you can also increase your prices. I’m not saying that you should forget your usual clients. You should always treat them the same way. The only reason you should offer a more expensive premier product or service is to increase your company marginal contribution. In addition to this, you will always have some clients willing to pay a little more to have an even a better experience. Some of them even like to be called premier or VIP clients.
Understand which products or services are selling more
I am sure you have heard about the Pareto Law (80, 20). There are many books talking about this subject. The first time I came to understand how to use this law practically was when I used to work as an assistant to my father. He understands this law more than anyone else I know. Let’s apply the Pareto Law to your company sales. I am sure that 80% of your company turnover comes from 20% of your products or services. If this is not the case, 80% of your company turnover comes from 20% of your best clients. Would you like to bet? I am 80% sure that I would win the bet. If you want to apply this concept try this exercise. Prepare a list of all of your clients with how much money they bring to your business. Then simply classify them from the top to the bottom in terms of how much money they bring to your company. You then divide the total sales spent by each one by the total company sales. You will see that a minority of clients will bring in 80% of your company total sales. Are you surprised? I am sure you are.
Now, what should you do with this analysis?
The first thing is to allocate more time and energy to these 20% of clients. Once again I am not saying forget the other 80%. They are also very important to you and your business. At Vertice Services our clients know that it does not matter if they are self-employed or they have a small, medium or big company, we always treat them very well.
If you apply the same exercise to the products that you sell the most, you should always allocate more time and energy to these products. You should promote them more than the other 80% of products. You should also understand these products better than the other ones. You should always offer these products first to any potential client. Perhaps the impact of a low price increase into this product will not have a very serious impact on your business but this increase could definitely have a big positive impact in your company profitability.
Never be ashamed to ask referrals (word of mouth)
Some people are always ashamed to ask their existing clients for new referrals. I don’t understand why. Some people help you to bring in more clients. On the other hand, it must be clear to you that an individual referral is different from a business referral. In a business-to-business situation it is very different. The main difference is that in a commercial business relationship your company commercial partner is looking for a sales commission. Please make sure you understand the difference.
Introducing new products/services to existing clients
If you are in a situation when you already have existing clients and they are very happy with your company, maybe you could think about offering them a complimenting product or service. I will give you a practical example. Let’s say for instance that you own an estate agency. You could offer property maintenance services to your clients.
Just be careful when you offer complementing services and products. Make sure you never forget your main core business. Also, you need to make sure that you will provide this service with the same high quality. You need to avoid losing clients when you do this. Another point to be considered is if you want to subcontract and rely on other businesses to sell or provide the services on behalf of your company you need to make sure you know which company you are dealing with. They can practically destroy everything you have done so far.
Increase your prices
It is surprising to know that the majority of your existing clients would be willing to pay more for the services and products you are selling. This happens when you provide high quality customer service or when you are offering a very good product to the market.
I am not saying that you must increase your prices but there is nothing wrong with doing so. In my view you should increase your prices to count for inflation. It is only 2% but it is every year. If you accumulate increase on top of increase in 5 years it could reach a 10/15% increase. It can hurt your business a lot.
In some cases, a small increase of 5% could mean an increase of 20% in company profitability. Think about it.
2) REDUCE COSTS
One of the easiest ways to increase your company profitability is to reduce your company costs.
High productivity could make a big difference
There are many ways to increase your company productivity. One of them is to make sure that you organise your company workflow and divide it into organisational processes as much as you can. This way you can make an analysis of your company processes and then you can try to find as many ways as you can to improve each process. You may think that your team has undertaken their processes effectively but I am sure that there is scope for improvement. We can always do things better. You may tell me that it doesn’t matter as you’re a one-man company. It does matter. The first thing you should do is prepare a list of all the tasks you need to undertake on a day-to-day basis. Then you should allocate each task into each department and ensure only one person is responsible for each department.
Investment in equipment when necessary
A way to reduce your direct costs is to invest in equipment. Equipment doesn’t necessarily mean production equipment but can mean office equipment. You should always look for equipment that could substitute human labour. I am not saying fire your employees. You can always find something else and more important for your employees to do it.
In addition to this, if you invest in specific equipment, make sure you employ the right technical people to use them. If you get the wrong people to do this, it can cost you a lot of money. Please, do not forget the equipment insurance.
Equipment can definitely increase your company productivity and thus decrease your costs.
Investment in software
I can’t see any company growing without software. Application software has been used for many years to help companies. Not only is it used to keep customer data but it also helps you organise your company processes. As a general rule most of us start using any kind of organised system to control our company. As the company grows it becomes quite impossible to control data using an Excel spreadsheet. This is the reason you should invest in very good software. Software can definitely increase your company productivity.
Training your employees
You need to make sure that your employees undertake their responsibilities in the most efficient way. Lack of training could decrease your company productivity. Perhaps your employees are doing the same task twice because they haven’t been properly trained. You always need to offer as much training as necessary to have the best employees as possible. In addition to this, a well-trained and motivated employee will also help new employees. Sometimes a well-trained employee could do the work of two employees. Believe me.
Subcontract when necessary
Do you really need a full-time employee to undertake each of the company’s roles? In most of the cases – especially when the company is growing – you will need more time allocated to functions than you would ever think would be necessary. A few examples include debt collection, courier services, IT software development, IT hardware and network specialist, legal services as well as marketing services.
At Vertice Services, we are happy to have a very good team of subcontractors. We could even call them employees – they are really part of our family. They understand our company culture and values very well. They are as committed as anyone else in our organisation. Make sure you employ subcontractors that understand your company objectives. Remember, there are good people and bad people offering their service to the market place. Always request customer recommendations before you subcontract them. Having very good subcontractors can decrease your company costs. The question is: when is it better to have employees rather than subcontractors? The answer? When it becomes cheaper to have an employee working for your company. Do take into consideration that it is not just a new employee, they will be utilising your company’s expenses including other administrative expenses.
Have you heard about an operational manual? I believe you have. An operational manual is a document detailing your company processes. It can be prepared in various formats and it should be your company muscles. You need it to organise your company into departments, responsibilities and tasks. You should write everything down in a document and ensure that your employees understand the manual well. Any questions about the document should be carefully answered by yourself. You will definitely increase your productivity when you prepare an operational manual. Why do you think that McDonalds is so well organised? If you can, look at their manual. I have read it and it is the best operational manual I have seen in my life.
Buy more for less and find alternative raw materials
If you are in a business which buys raw materials you should apply Pareto Law again. Discover which products your company buys a lot of and then try to renegotiate with your suppliers to reach a better price. You could also try to join other companies to increase your purchase power. Another alternative would be to find new raw materials that could replace the ones you are using at the moment.
3) REDUCE EXPENSES
Do you really need a very big space? Rent is expensive, especially in London
In my experience, one of the biggest expenses your business can have – especially if you have an office-based business – is the rent. Office rent is expensive particularly in London. Try to find ways to reduce this business expense. In some cases, a business doesn’t need to have an office space, especially with the new digital era. Most business people want to do business online and hold discussions on Skype. They want to utilise their time as efficiently as they can. Vertice Service is different. We see the vast majority of our clients personally. I am not complaining about it. I prefer to see clients personally and to have a coffee rather than swapping emails. But some businesses don’t need an office. Another issue is: Do you really need to have your office in such areas? If not, try to find a similar office space in another cheaper area.
Find a different supplier
Are you sure your business is spending money wisely? Finding different services and utility bill suppliers could also decrease your company expenses. In a very competitive market you can find a different supplier with a better price. Please think about this carefully as changing your supplier can affect your company processes.
Apply an expense budget plan
An expense budget plan is a very useful tool that can help reduce company expenses. You should know how much money your company is spending with each expense. Prepare simple documents which contain the expense headline, how much money your company is currently spending, how much you can decrease it by and when and who will be the person responsible to reduce the expenses.
Travel only when necessary
There are many people who don’t understand the difference between holiday and business travel. The objective of a business travel is purely business and not entertainment. When travelling for business you should make sure you achieve your travel business objective and you should go back to work as soon as possible. Travelling – especially internationally – could cost your business a lot of money. There is no problem if you wanted to sightsee but you should understand the difference between a family holiday and a business holiday. Also, you should fly by yourself on a business trip. You should be as focused as you can. You can travel with your wife and child in a family travel holiday without your computer.
Find a good accountant
I get very frustrated when business owners try to negotiate fees with consultants, legal advisers and accountants. The accountants are professionals who should work for you in order to legally save you money. You can never see them as being a business expense. Our objective is for you to save money, to reduce headaches and to reduce your expenses.
Also, be careful with accountants. They can be dangerous creatures who only think about themselves.
Be careful with solicitors
Solicitors are rare creatures too. Most of them are professionals but some of them always forget their calculator. They can make you sign an open agreement while giving you an idea of how much money you will probably spend. After a couple of months you realise that you have spent ten times the value agreed with the solicitor. Try to cancel the legal contract with them and you will have to spend another large amount to hire someone to represent your company in the court against the previous solicitor. A piece of advice would be to make sure your solicitor gives you the actual price and not an estimate.
Reduce legal costs (find agreements before going to the court)
I have spoken to business individuals my whole life and I have never seen one company that has never had a legal dispute before. It happens all the time. The advice is to try to avoid unnecessary legal costs as much as you can. They can be very expensive. Try to reach an agreement before going to court. Also, you will need to allocate time and energy to attend the court which in some cases are priceless.
Marketing should be measured
As I mentioned before, you should always measure what will be the financial return of any marketing initiative. You also need to make sure that you find the right marketing company. It could cost you up to three times the amount you forecast. If you hire the wrong marketing company you will need to work on the same project again and again.
Be careful with people who say they are very good consultants
You should be very careful with what kind of business consultant you are buying consultancy from. If you hire a good, practical and experienced business consultant he can help you with contact introductions from his network as well as helping you to increase your profitability.
Be careful about cutting expenses that could damage your company’s reputation and then affect your employee’s satisfaction
You need to be careful with the overhead reduction plan. What I am trying to say here is that some expenses cannot be touched because they can reduce your employee/client’s morale and satisfaction which can be dangerous. For example, let’s say for instance that your company has given a birthday party to each employee and then you decide to stop any celebration paid by the company. Think twice before you do this because people will be upset.
4) REDUCE CORPORATION TAX
Choose the best legal structure for your business
You always need to find out what the best legal structure for your business is. You may be self-employed at the moment but once your business reaches a certain level of turnover and profit it will be more advantageous to set up a limited company. A limited company has a tax advantage in comparison to be self-employed because you can be a director or a shareholder. This way you can choose to have a salary as a director or you can cash the money out as dividends. At the same time you are not obliged to cash all the money out as dividends. You have the option to keep the profit as retained profit and carry forwards the profit to cash the money out next year. The objective of this article is not to describe in too much detail the best legal structure of your business but you need to make sure that you have a very good accountant. The accounts need to review your situation quite often to advise you what you should do. It can make a huge difference to your profitability if you are not using the best legal tax efficient structure for your business.
Prepare a budget for the money the company should pay in corporation tax
Quite often business owners forget to keep separate company funds to pay the company corporation tax which is 20% of the company profit. The corporation tax should be accessed and paid 9 months after the company financial anniversary (after 12 months). This means that the company should pay corporation tax only 21 months after the company was registered. You need to make sure the company will have money to pay the corporation tax bill. If the company will not have the funds available then the company will receive penalties and finance surcharges.
Never forget the VAT
VAT stands for value added tax. It is an indirect tax that your business should charge once it reaches a certain sales threshold (2015 £82,000). It is not my objective to go into much detail about VAT. However, if you think your business will definitely reach this level of turnover I would advise you to charge VAT since the beginning. The main two advantages of being proactive are:
1. You can credit as a VAT input any VAT your business has spent from expenses.
2. You will avoid surprising your clients when all of sudden you need to increase your product or service price by 20%. If they are not be willing to pay a higher price, your company will need to pay itself for this increase and it could cost your business a lot of money. Moreover, your business profitability will definitely decrease.
PLEASE, be careful with the VAT threshold all the time.
Invest money before your company pays the taxes
Another way to decrease your profitability is to always invest back into your company. Also, bringing expenses predicted to be spent next year to this year can also increase your costs and expenses and thus decrease your profitability and the company will pay less tax.
I hope you enjoyed this article. If you would like to make any comments or suggestions, please send me an email at Rodolfo.firstname.lastname@example.org
Rodolfo Basilio is a senior accountant working for Vertice International Accountancy and Consultancy (www.verticeservices.com)