The NorthCo 6 Step Profit Improvement Plan
Profit improvement is not a difficult concept, more revenue than costs equals a profit, less revenue than costs equals a loss.
So why is it so hard for many businesses to make money? In our opinion, it is because the vital ingredient is the lack of skilled execution.
When undertaking a profit improvement assignment, we start by creating a simple 6 step profit improvement plan. The 6 step process can be applied to any business, in any industry, in any country, through any economic cycle.
- Create a Mission Focused plan
- Increase customer numbers
- Increase the number of times customers buy
- Increase the average sales value
- Increase margins
- Reduce costs
SMALL changes can lead to significant performance improvements.
Here’s a model which demonstrates the impact of a 5% improvement across the profit drivers within a business:
In this example, we assume the company has 800 customers, buying six times a year and the average sale value is £500. So if you multiply the number of customers by the number of sales per year and average transactional value, you will get sales turnover of £2,400,000 a year.
Let’s say the company is making a gross margin of 50% for every sale it makes – generating a gross profit of £1,200,000 on that level of turn-over. If the overheads to run the business are £800,000, it will be producing an operating profit of £400,000 per year.
By making a 5% improvement in each of the key profit drivers, we can increase the operating profit from £400,000 up to £698,608. So that’s close to a £300,000 increase in operating profit, or a 75% increase – all from a tiny 5% business improvement plan!
Under the 5% improvement plan, instead of 800 customers, there will be 840 customers who will come and they buy 6.3 times a year and increase the average sale value from £500 to £525. The business turnover will increase to £2.8 Million dollars.
If we also increase the gross margin from 50% to 52.5% and reduce overheads by 5% we can generate an extra £300,000 profit for this particular business. So that’s a massive increase in profit by making a minimal change in the principal profit drivers.
We appreciate every business is different and some of the 5% improvements might be difficult to achieve but in saying that, there are probably some of these key profit drivers that can be increased by significantly more than 5%. Profit improvement potential may be a lot different from our example better or worse.