Creating extra profit to fund your growth
One of the reports I ask for when I start working with a client is their segmentation reports. These are reports that segment their products/ services, clients and sectors into league tables in descending order of gross profitability.
If you do not have these reports and look at them at least quarterly, then download them from your bookkeeping system or ask your proactive (note the adjective) accountant.
These reports are full of gold dust.
Once you have these, you can identify where the low profit sales are that are diluting your overall gross profit. Without them you have an overall gross profit figure that you don’t really know if or how it can be improved.
I once walked into a multi £m business that was losing money and identified that 35% of their annual sales were below the desired GP target set by the business. Nobody had reviewed for a couple of years and therefore, the impact of cost increases and price reductions hadn’t been noticed. It was literally killing the business.
Once you have identified the low GP products/ services, you can adopt one of five strategies:
Increase price – this may be articulating your proposition better or increasing it to heighten demand. What is the market rate and what do you need to do to achieve or exceed it? This is the easiest strategy but often the one businesses shy away from due to fear of losing the client.
Reduce cost – can you deliver the service in quicker time (a contact of mine reduced his time to deliver a service by 75% using AI which enabled him to offer a more competitive price at a higher GP). If it’s a product, can you negotiate a better cost or consider off-shoring to an alternative supplier?
Substitute – offer an alternative product or service that does the same job but offers you a higher GP. E.g. if I want new tyres on my car, they’re all approved to the correct standards but some will offer a higher GP to the garage than others. Offer an alternative that often a new client doesn’t know any different.
Exit – if you cannot achieve a palatable GP, then consider exiting the product, service or client, which will bring up the overall GP of those remaining. Why put all your time and effort into selling something that doesn’t make you enough money?
Stick – sometimes there is a strategic reason why you want to not change anything. Perhaps it is a key part of a wider offering. Perhaps it is a loss leader. Limit the number and value of this segment as much as possible.
It feels counter intuitive to increase prices in a tough market or even exit a product or a client, but the cold hard facts are that you are better spending your time, money and effort where you can make higher GP. It makes more sense, is more effective and yields better financial rewards.
Across my entire client base, I can count on one hand the number of products or services that are still being sold are lower than desired GP levels. This means better focus, higher GP and improved cash. The profit created will enable you to fund your growth and give you better choices.
I’d love to hear what strategies you have adopted or are considering to tackle this problem.
Whatever happens, you cannot afford to bury your head and not know, and you certainly cannot afford to continue with a sizeable proportion of your sales on a low GP.
Best of luck with your implementation.
