by Holly Magister, CPA | Grow a Business |
As an entrepreneur works diligently to build a business, much thought and energy is devoted toward ways to make more money.
Many small business owners believe they should focus first on growing their business revenues with larger contracts, clients and the like so the business will produce the greatest amount of cash.
If indeed, a greater amount of profit remaining at the bottom of the Profit & Loss Statement is what a business owner is striving for, then one should consider undertaking this exercise before attempting to grow the business by increasing sales.
By doing so, they will be learn there are two ways to increase profit in a business.
How to Calculate the Amount of Additional Revenue is Needed to Increase Net Profit
First, ask yourself the following question and make the assumption your answer is as outlined in the example:
How much additional profit do I desire to earn in the next twelve months?
EXAMPLE: $25,000
Second, determine the Net Profit Percentage your company typically earns at the end of each year.
The net profit percentage is the NET PROFIT from the bottom of your Income Statement divided by the GROSS REVENUE at the top of your Income Statement. (Net Profit ÷ Gross Revenue)
EXAMPLE: $85,000 Net Profit ÷ $720,000 Gross Revenue = 11.80%
Next, determine the Additional Gross Revenue (sales dollars) which is needed to increase the business net profit by dividing the answer to the first question by the answer to the second question.
EXAMPLE: $25,000 Desired Additional Net Profit in the next 12 months ÷ .1180 Net Profit Percentage (aka Net Profit Margin) = $211,864
In this example, a business owner will need to grow the business by $211,864 in a given year with a 11.80% Net Profit Margin to end up with $25,000 additional net profit in the next twelve months.
Should a Business Owner Try to Increase Business Revenue?
Following this example, a business owner can answer if more sales is the best way to achieve more profit by answering this two part question:
- If I want to add $25,000 to my bottom line or net profit, what would I have to do to reduce my costs by $25,000?
- AND is reducing overhead easier to do than increasing my company revenues by $211,864?
Only the entrepreneur knows the answer to the last question. He or she is the one who wakes up in the middle of the night with worries about making payroll, personnel issues, inventory and servicing matters.
While growing a business’s via increased sales is a business goal many entrepreneurs share, the exercise defined above has proven to be valuable to many.
By computing the amount of additional sales it takes to increase the business’s net profit and considering what costs may be reduced to achieve the same goal, a business owner gains great clarity surrounding how to increase profit in a business.
There are only two ways to achieve greater profit and better cash flow. And profit and cash flow generated from a business are the two biggest factors to increase business value.
by The Exit Promise Contributors | Grow a Business |
By Matthew Cottrill
Close More Deals, Grow Your Business: The Sales Process
“We need sales training” is a comment expressed by many business owners who feel frustrated that their company is not realizing its full growth potential. Many times this comment is rooted in a frustration caused by gaps in the existing sales process that impede profitable growth. The lack of an effective sales process is one of the top challenges for many entrepreneurs trying to grow a profitable business.
There are many different variations of sales processes. Most companies have some level of sales process in place, but the question should be: “Is the sales process comprehensive enough to enable the business to realize its full growth potential?” In many cases the answer is “No.” Many times even companies with sophisticated CRM systems have major gaps in the sales process which make it difficult to recoup their investment in such costly CRM software.
The cost of having compelling gaps in the sales process is significant. The end result is the loss of key opportunities, clients, and market share to your competitors, or on the other end of the spectrum, winning business that is unprofitable. The latter could thrust you into the Deceptive Busyness℠ Trap.
Assessing the effectiveness of a sales process requires more than looking at key results measurements such as sales revenue growth and close ratios. When working to grow a profitable business, more strategic considerations come into play. This is not always an easy assessment to make, but, below are a few select questions to consider when making your assessment:
- Does the organization truly know its clients?
Does the company have a good understanding of their clients or potential clients? This knowledge includes understanding their pain, growth opportunities, economics (even if at a macro level), decision making process, and a wide range of other factors. Only when you understand this information well can you deliver an effective value proposition. If you don’t truly know your clients, then likely your sales organization is tossing value propositions against the proverbial wall with the hope that something will stick.
- Does the organization understand the end markets?
Is there a good understanding of the size, clients, and makeup of the markets in which the company participates? Which markets best fit the products or services that are offered? Why? Where is the biggest growth opportunity, or the most profitable opportunity? What market trends could impact the future (both positively and negatively)?
- Does the sales process provide critical information for formulating pricing strategy?
What value (in dollars $$$) does the product or service offered generate for the client? In what ways is it unique compared to your competitors? When asked to meet a lower price, are the competitive prices on a comparable basis (apples to apples)? Based on the unique value that the product or service generates for the client, can a premium price b charged? Is value-based pricing being used?
- Is there a good understand of the competitive landscape?
Are clients asked direct and pertinent questions about the competition on a regular basis? Is there sufficient internal information to do a thorough strategic analysis of the competition?
Difficulty in answering these questions might suggest that there are meaningful gaps in the sales process.
In addition to the obvious negative impact on sales, meaningful gaps in the sales process can have other strategic implications. The lack of information related to market trends and the competitive landscape can result in devastating blows to the business. These gaps will impact the strategic direction of the company, its market position, new product development, pricing strategy, and more.
One client saw an 80% reduction in sales over three years in one of their major product lines as a result of not being fully aware of the rate of adoption of a new, disruptive technology. Had a more comprehensive sales process been in place, this critical information would have emerged sooner and allowed them to develop a strategy to compensate for the disruptive change.
A comprehensive sales process will have elements of management oversight, strategic and tactical planning, and a formalized sales methodology. An important part of the process design is to ensure that it is both effective and efficient, and that the process serves the organization and not vice versa. A good process also allows for a higher degree of transparency within the sales organization, consistency in execution, and accountability. It also serves as an excellent training tool for new sales representatives and others.
A comprehensive sales process provides a framework for the sales organization to effectively and efficiently execute the sales strategy and help the company gain an intimate understanding of clients, markets, and competition. This information will provide the basis for market strategy, new product or service development, pricing strategy, and other key factors that enable the business to reach its full potential.
by Holly Magister, CPA | Grow a Business |
Recently I found myself looking around for a candid camera and asking “is this really happening?” You see, over the past three weeks or so, my own business continuity plan has been tested and tested and tested again.
I live to share my story and to encourage other women in business to be prepared.
Planning for What You Think Will Never Happen to You
Working with business owners who plan for the sale or transfer of their business to others gives me the opportunity to really get to know my clients. One very important part of our planning process is to work with the business owner as they decide how to protect their business in case of their incapacity and how to transfer their estate to others after they pass away. This is where my story begins.
Three weeks ago, I spent the afternoon with one of my favorite clients. We worked with her Attorney to update her business continuity and estate plan. This important planning was done many years ago and it was time to make some major changes. The most difficult part of the discussion was with regard to matters she needed to address in her family. I sensed it was emotionally difficult for my client to do so. We advised her to make the necessary changes as soon as possible.
Not Another Day at the Office
As I was driving home from the meeting, I became very ill. If you know me well, you know that I don’t get ill often and when I do, I press on and just work through it. I absolutely hate being ill.
Before the evening ended, I found myself in an ambulance and on an operating table having an emergency appendectomy. It literally happened in a matter of a few hours with absolutely NO advance warning.
In addition to a good surgeon, I needed to set in motion my own business continuity plan! I began to look for the candid camera when I realized I just spent the afternoon discussing such a plan with my client.
Although I thought the surgery would have a good ending (pun is intended), the thought of going under general anesthesia caused me to pause and think about my own estate documents. I wondered if my husband knew where my life insurance policy was located. Really, I did. Maybe it was because my client and I chatted only a few hours beforehand about the fact that she had life insurance, however didn’t know whether her children knew about the policy. Or maybe it was the medication they had me sedated with?
I also though about whether someone in my office could transfer the payroll money into the payroll account the next day for me or not. You see, the person who normally handled this task was on vacation and I was the backup to him! So I needed a backup for my continuity plan!
And I needed to find a way to cover the meetings and conference calls I was scheduled for over the next week…or so. That was easy enough as I asked my husband to call my assistant to make those arrangements. So in a matter of a few hours, my continuity plan kicked in. All was well.
Not So Fast…
While this may seem like a very self-serving blog post…blah, blah, blah, aren’t I smart? Don’t worry. I’m not. Upon return to my home, post-surgery, I encountered few bumps in the road. Seems I missed a few opportunities to plan for the unforeseen and found myself looking for that candid camera again. I will share more in my next blog post about this and what we must do now.
As for my client, she expeditiously finalized her business continuity and estate plan. In fact, she told me that what happened to me only hours after our meeting nearly scared her to death!
If you haven’t drafted or re-visited your business continuity plan, I encourage you to do so. If you are a business owner and have a family, you have many people you care about who rely on YOU. What’s holding you back?
