20% more profit - with this small tweak08th December 2021
I recently came across a crazy fact...
If NASA sent a rocket to the moon, and at launch it was one degree off course, it would be just 92 feet off course a mile into the air.
It doesn’t sound too terrible...
...But that rocket would never reach the moon, because it would end up over 4,000 miles off course.
And if it continued travelling to the nearest star, it would end up 441 billion miles off course - rather a big miss, wouldn’t you say?
The point is that very tiny, seemingly insignificant changes can have an enormous impact over time.
And that’s certainly true in your business.
Take the subject I’ve been talking about in my recent emails - cutting costs.
Business owners often hate tightening their belts, because it can involve difficult decisions, can mean giving up things you care about and be a bureaucratic hassle. Plus, some people associate “having to cut costs” with “failure”.
But the truth is that there’s hardly a business on the planet which doesn’t need to cut costs. We almost all overspend.
And that means that almost every business - including yours - could be more profitable, and there could be more money flowing into your pocket...
...If only you shaved a little off your expenses.
Today I want to show you why that isn’t as difficult or as radical as you might think...
...And why many businesses only have to cut their costs a little bit, to feel a big impact on their bottom line.
It comes down to simple maths. (And here if you’re not fond of numbers you might have to bear with me a bit, but I promise to keep it simple and brief.)
Let’s say you sell your star product for £100.
It costs you £80 to make.
That leaves you with a profit of £20.
It’s quite tight, but hey - you’re profitable!
Now imagine you cut just 5% off your costs...
...So suddenly it costs you £76 to make, rather than £80.
That’s really a small cut to your production costs, isn’t it?
But your profit now grows from £20 to £24.
That’s one giant leap for your bottom line.
(20%, to be precise.)
Now imagine that you sold 5,000 units of this star product each month.
Suddenly, you’ve made an extra £20,000 - just by shaving a few pounds off your costs.
It’s worth the effort, right?
What’s more, if you quite fancy an additional £240,000 in profit each year, cutting a few expenses is probably an easier and faster way to do it, than the alternative...
...which is making 20% more sales.
That might not be fully in your control - it would depend on market conditions - and you’d have to increase your marketing and find new customers.
Now, the maths doesn’t work exactly the same for every product. If your profit margins aren’t quite as tight, the impact of a 5% cut won’t be as dramatic.
And you always have to make sure you’re cutting the right things - those which make strategic sense and which won’t impact the quality of your product.
But the general principle still stands.
Just like the rocket that gets sent to the moon, a tiny change in direction can have an enormous impact on where you end up. So if your expenses are too high, it can easily throw your financial goals off course.
And even a small cost-cutting exercise has the power to dramatically increase your profitability.
One of the ways we help our clients is playing with different scenarios...
If you cut X%, how would that impact your bottom line?
What would your figures look like if you cut a little from one product line... But spent it on increasing capacity somewhere else instead?
And what if you increased your prices by 2% at the same time? (Hint: Small changes to your pricing structure can have an outsized impact on your profitability as well!)
Making well-informed decisions about your costs (and your pricing) is all part of good financial management.
These aren’t decisions you should be making in a vacuum or on a whim.
You should always make them with all the figures in front of you, so that you make the best choices for your future - and feel confident about them.
Corporates take this planning for granted. If you’d like to take a similarly professional approach to your financial management, please do get in touch with me today.
Simply email or call us on 01279 647 447 to arrange a no-obligation chat. I’ll get right back to you.
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