Now that you’ve worked out your Net Profit (see Why Do We Keep Accounts in our Businesses? – part 2: How to Discover your Net Profit if you haven’t yet), you may find that you want or need to increase your profitability. There are some different options for this:
- Increase prices
- Develop new products
- Personalise your products
- Decrease costs
- Decrease time spent making each item
- Decrease time spent on admin and overheads
- Increase sales (but only if each sale is already profit-making)
1. Increase Prices
I know that you worry that you’ll price yourself out of the market. Here’s how to calculate it to get some data to help you decide.
If you currently sell 100 cushions a month at £25 each, and you’re thinking about raising this to £30 each, then what you need to know is the difference in number to sell to make the same revenue. So:
Current sales: £2500 = £25 x 100 cushions
New price: £2500 / £30 = 84 cushions to sell per month
Even if you sell 16 less cushions (100 – 84) each month, you’ll make the same amount of revenue. If each cushion takes you 30 minutes to make, then you’ll also save 8 hours per month, which you could use to develop a new product.
2. Develop new products
As a maker or artisan, you’ll want to develop new products to increase your customer lifetime value – they’re more likely to buy from you if you have different products on offer.
3. Personalise your products
As a maker or artisan, hopefully you’ve built this into your business model from the beginning, along with a fair price for personalisation.
1 in 5 consumers who expressed an interest in personalised products or services are willing to pay a 20% premium.
The Deloitte Consumer Review: Made-to-order: The rise of mass personalisation
4. Decrease costs
This is where your accounts will shine. Now that you’ve organised your heap of receipts and emails into accounts, you can see how much you’re spending in each area.
- Perhaps you hadn’t realised how much you’re spending on memberships that you currently aren’t taking the time to make the most of; either spend the time on these, or cancel them.
- Perhaps you realise by looking at your insurance account that you have multiple insurances that cover the same thing, and you can cancel one.
Since you’ve worked out your materials and sundry cost per item, you can see if there are savings to be had on these that are worth it.
- Maybe you can bulk buy now that you have some cash flow.
- Maybe you can find a cheaper supplier.
5. Decrease time spent making each item
If you can streamline your processes, spending less time to make each item, then you have more time to spend on revenue-generating activities. That could be more advertising and promotion, or making more products.
6. Decrease time spent on admin and overhead
If you find that you spend an entire day each week on your admin, bookkeeping, posting things for sale on your website/etc, liaising with market organisers, etc, ask yourself if you could outsource any of this profitably?
If your bottleneck is production – you don’t have enough time to make enough products to meet demand – then this will be obvious. As long as your profit from a day of making is greater than what you’d spend on outsourcing those tasks, then you’ll come out ahead – and spend more time doing what you got into business to do.
Returning to our example from the previous post, if your net profit is £6.72 per cushion and you’ve found ways to streamline your processes as mentioned above so that now you can make 3 in an hour, then you can earn £564 per month selling cushions from one day per week. If you can free up that time by outsourcing to a qualified bookkeeper at £150 per month and a virtual assistant at £300 per month, then you’re coming out £114 more profitable, and you’re doing more of what you love.
7. Increase sales (if each sale is already profitable)
If you’ve worked out your net profit and found that you’re selling at a loss (so it’s a net loss), then increasing sales may make that loss bigger.
If your net loss is £5/cushion, and you sell 10 cushions, then you’ve lost £50.
If you sell 100 cushions, then you may have lost £500.
You will have to check this with your own accounts, working out what the numbers would look like if you changed sales, fabric, sundries, etc. You also need to work out how you might get those extra sales and include that in the calculations.
- Would you pay for advertising?
- Would you spend time creating content to sell it, whether that’s social media posts, blog posts, writing an advertorial to put in the local paper, etc?
- Would you spend time building your public relations strategy?
If you would pay for advertising, add that in as an extra cost.
If you would spend time, work out whether that would mean you would make less items. If you’d have less items for sale, you can’t increase the volume of sales (unless you have a store of unsold products), so go back to item 1 about increasing prices instead.
Conclusion
These are just a few ideas to increase your profitability; there is a longer list here. The bottom line, though, is to make your accounts work for you on this front.
- How much extra profit will increasing sales prices by £1 bring you?
- How much would you gain by negotiating a 5% discount on your biggest supplies?
- Is it worth spending a whole day comparing business insurance to save up to £100/year, or should you set a timer for that task?
If you’ve been trading for at least a few months, you’ll have some numbers on which to base your decisions. Ultimately, we need to be comfortable with the decisions we make, so the numbers should inform your decisions, rather than have the final say. But I find that without the actual numbers, our feelings about the answers relevant questions might have are often quite wrong. This is why I’m passionate about getting good numbers into the hands of all entrepreneurs, no matter how small their enterprise. Management accounting, which asks and answers questions like these, is too often only done in large enterprises with their own in-house finance teams. There’s no reason why you shouldn’t benefit from good numbers to inform your decisions, and help you see where it’s best to spend your energy.