Bottom line profitability is essential for business survival. Here are five tips to increase your profits.
#1. Know your true costs
When you understand and track all of your costs you can make decisions about whether the costs are too high, acceptable or too low. If a cost is too high or too low, determine why. You might have estimated incorrectly or there is a problem that must be resolved.
There are four types of cost:
Direct costs are those costs you incur because you sold something. If you don’t sell, you don’t incur these costs. Direct costs usually include labour used to produce jobs, equipment, materials, commissions and SPIFFs, warranty, freight, subcontractors, union dues, and permits.
Indirect costs are all of the costs you incur to stay in business. These include rent, utilities, office salaries, etc. Look at the overhead cost list on your profit and loss statement to see all of them.
Tangible costs are costs that you can see. These are the costs that you write checks for. They include the direct and indirect costs for your business.
Intangible costs are the most dangerous types of costs because they are “hidden” and can dramatically affect your profitability. One of the typical intangible costs is sales cost. Owners accept a lot of intangible sales cost. If your sales person’s closing ratio is 25%, he is “burning” 3 out of 4 leads. How much do those leads cost? Is burning 3 out of 4 acceptable?
#2. Know your true pricing
Pricing includes both direct costs and overhead costs.
To calculate your overhead cost per hour look at last year’s year end financial statement. Divide the total overhead cost by the number of revenue producing (or billable) hours.
To price properly, start with the bottom line of your profit and loss statement. How much profit do you want to make for each sale? Then add the overhead cost for that sale. This gives you the gross profit for that sale. Then add the direct costs for the sale. This gives you your selling price.
Use this example for pricing:
- You want to earn $50 net profit for each billable hour (revenue producing hour).
- The project will take 8 hours
- The wages of the person working on that project is $40 per hour.
- Overhead cost is $30 per hour
- Materials used are $25.
To calculate the price to the customer:
- Profit is $400 ($50 X8)
- Overhead is $240 ($30 X 8)
- Gross profit is $640
- Direct cost is ($40X8) +25 = $345
- Price to the customer is $985
If it is higher than your competitor’s price, figure out a way to add more value to justify your pricing.
#3. Know your monthly productivity ratio
Your monthly productivity ratio answers this question: For every dollar that comes in the door, how much is the company spending on payroll plus payroll taxes?
The ratio is Total Payroll plus State and Federal taxes divided by sales.
Total payroll is all payroll expense for the month including owners salaries, direct labour, and overhead salaries. Do not include worker’s compensation, health insurance, and other benefit expenses in this equation.
If your monthly productivity ratio is 65%, that means 65 cents of every dollar is being spent on payroll and payroll taxes.
Then track the trends on a monthly basis. If your productivity ratio is increasing, that is a warning sign that your employees are not being productive or that your sales are decreasing. Find out why the ratio is increasing and fix the issue.
#4. Ask for referrals
Asking for referrals is as simple as putting a statement at the bottom of your service tickets, on proposals, and the back of your business cards.
The best way to grow your company is through referrals from happy customers. Remind customers that you appreciate referrals by putting a statement on your service tickets and business cards.
Print “We grow our company through referrals from satisfied customers. If we provided excellent customer service, please tell your friends and colleagues. If we did something wrong, please tell us and we will fix it. Our goal is 100% customer satisfaction.”
This statement lets a customer know that you are serious about providing outstanding customer service and that you appreciate referrals. Some will call you with referrals. Some will let you fix a problem rather than spreading the fact that they were unhappy to friends, neighbours, and social media.
The statement on proposals should be slightly different:
“We grow our company through referrals from satisfied customers. If we provide excellent customer service when we NAME OF PRODUCT SOLD, please tell your friends and colleagues. If we did something wrong, please tell us and we will fix it. Our goal is 100% customer satisfaction.
Then, the person who sold the product/project should call 30 days after the work has been completed or the product bought to make sure that everything is ok. He should ask for referrals at this time by asking the question, “Who have you talked to about your new ________?” When the customer answers he says, “Do you think NAME would be as happy as you are with a new _______ like you have?”
#5. Reactivate your inactive customers.
Make a list of all customers who have bought from you in 2019 and 2018 but did not buy in 2020. Contact these customers and give them a reason to buy in 2021. Contact might be through a postcard, a letter, or best, a telephone call.
You might start the phone call with, Ms. Customer, thank you for using our company’s products in the past. I probably don’t want to know the answer to this question, but I need to know the answer.
Then pause…usually you’ll get a laugh.
Then ask this question: I’ve noticed that we didn’t do business with you in the past two years. Did we do something to make you mad?
Then resolve the issue and see whether you can get the person back as a customer.
Implementing these five actions will help you increase your profits.