Increasing profits

Every business would like to increase profits, especially in today’s volatile economy, and it doesn’t take a major breakthrough to see a significant difference on your bottom line. In fact, minor changes in key areas can spell the difference between surviving and thriving.

The diagram shows in the first column the numbers in a business that has, on average, 2,000 prospects visits in a month. This is about 66 visitors per day. Fifty percent of those visitors end up buying something and the other half walk out the door empty handed.

The average purchase amount is $100, and the customer returns about four times in a period of time (month or year). This yields sales of $400,000. In this example, the business would subtract its variable costs (VC), which is at 50 percent, and its fixed costs (FC) amount of $160,000, so the net income before taxes would be $40,000.

An easy way to increase profit is to cut expenses, and since salaries are one of the largest expenses in a business, owners often realize an instant boost in profits by laying off some of their people. This is why you read about major corporations that have massive layoffs so they can stabilize their bottom line. In the example, if you were to cut variable costs to 40 percent, instead of 50 percent, or cut your fixed costs from $160,000 to $80,000, or a combination of both, the business would instantly double it profits.

However, cutting costs also has hit repercussions and losing people or minimizing your inventory can affect the value customers enjoy from your business. Another way to increase profits is to boost your sales, so let’s focus on how to increase sales incrementally in specific areas. In the second column, under “improvement,” the number of prospects that visit stay the same; however, instead of a 50 percent conversion ratio, it improves by 5 percent to 55 percent. This would bring in 100 new buying customers for the month.

A 5 percent improvement of the average amount purchased would make the cash register ring with $5 extra dollars on each transaction, and only coming in .2 times, on average, would give a 21 percent improvement in sales. The fixed costs remain the same, but the variable costs would kick the overall expenses up an additional $42,000. However, the business would more than double its profits.

If the business is experiencing tough times, as many businesses in the CNMI are right now, and instead of having a 5 percent improvement, there is a 5 percent decrease in each area, it would have a negative impact on the business. Instead of a 50 percent conversion ration, it would be 45 percent, and instead of an average $100 purchase, it is $95. The last factor to consider is your expenses, which would be less; yet, the net income prior to taxes would be almost nothing—only $2,450. You can see that with only a 5 percent change in three key areas, your business could experience a significant improvement or a devastating blow to the bottom line.

The principles that work in business also apply to personal and home money management. As the cost of living has increased, your discretionary dollars have become thinner and you’ve noticed the money pinch that comes after you’ve spent your paycheck on bills. You can change your personal financial situation by finding ways to bring in more money or ways to reduce your expenses. Like businesses, most people find it easier to cur their costs, but working to improve both areas is often the best thing to do.

One other area that could make a huge difference in a business is the ability to bring in more prospects. Typically, businesses will spend hundreds or thousands of dollars each month to get more people to visit and buy something through advertising and other promotional methods. Using the same example in the second column, you’ll remember that about 66 prospects visit the business per day and only 55 percent of them purchase something. If only five more prospects visited the business per day (71 times 30.33 average days per month), and nothing else changed in the second column, the results on the bottom line would be $101,157, or an increase of 152.9 percent!

These are amazing figures that can come from strategic improvements in key areas of your business. These figures will vary with your business based on your actual numbers, but the main point of this example is that it doesn’t take dramatic improvements or changes to realize a huge difference on your bottom line.