Traditionally we look at profit development from the standpoint of three variables, namely sales, expenses and profits defined by the formula:
SALES – EXPENSES = PROFITS
In this approach, each variable depends on the other, so normally businesses look at either increasing sales or decreasing expenses in order to improve profitability.
IS THERE A SIMPLE WAY TO GROW YOUR PROFITS?
For years, at ActionCOACH, we have taught a simple formula to massively grow profits in any business and one which moves away from this narrow, traditional view and instead uses the “Divide to Multiply” principle.
Interestingly, those owners in the category of small-and-medium sized businesses seem to embrace this formula far easier than those “big business” owners who have been in business for a long time.
So what is this simple formula?
THERE IS MAGIC IN THE NUMBERS!
Be aware of one thing, however. The following “formula” is based on a series of profit “drivers” – best explained by simple numbers and formulas. If you are number phobic, don’t worry.The examples are simple and easy to follow.
However, know that as an owner, there is “magic” in knowing numbers – from what your numbers in your business really are – to how new sets of numbers can literally add thousands, or even hundreds of thousands of pounds to your bottom- line. When you can become a master of your numbers (because, after all, the language of business is numbers), you will see vast improvements in your business and in the opportunities presented to you.
And, when you are comfortable with the numbers in the “secret” formula, you will be ready and able to work all the factors in the equation. Then, you’ll start seeing more bottom-line growth and profit than you – and your competitors – could ever imagine.
THE “5 WAYS” … WHAT IT IS AND HOW IT WORKS FOR YOUR BOTTOM-LINE
So what is this simple growth and profit-focused formula?
While most people see profits based only on two factors (revenues and costs), the “5 Ways” sees profit based on 5 separate profit drivers.
With just a few simple distinctions, the “5 Ways” gives you 2.5 times more opportunity to boost your profits – versus other “expert” owners who love to “cut their way” on the expense side to boost their profits.
What are those factors? Very simply:
- Leads. This is the total number of leads – those people who have contacted or who have been contacted by the business – over the course of a year.
- Conversion rate. This is the percentage of people who actually bought. For example, if 10 people walk through a store and three people buy something, that store’s conversion rate is 3 out of 10, or 30%, for that day.
- Average £ sale. This is the average pound amount per sale – estimated over the course of a year. It’s just an average, and can range from £4 or £10 (say for a convenience store) up to tens of thousands of pounds (say for a construction business).
- Number of transactions. This is the number of purchases the average customer will make over the course of a year. Again, this can be an estimate. In a retail setting, this will probably be larger than those companies that operate professional services industry.
- Profit margin. This is the profit percentage of each and every sale. Simply put, if a business sells something for £100, and profit was £25, the profit margin is 25%.
So how does this all relate to top line revenue and bottom-line profit?
HOW TO APPLY THE “5 WAYS” TO YOUR COMPANY
In your sample company, we can use a very simple formula to multiply the factors we’ve just discussed.Remember, this formula multiplies factors, not just adds them.That means the cumulative impact on the bottom-line is massive.
The “5 Ways” formula looks like this:
Leads x Conversion Rate = Customers
Customers x Avg. Value Sale x Number of Transactions = Revenue
Revenue x Profit Margins = Profit
In your company, let’s say you have either estimated or fully determined the following numbers:
4,000 leads x 25% conversion = 1000 Customers
1000 customers x £100 average sale x 2 transactions = £200,000 Revenue
£200,000 revenue x 25% profit margin = £50,000 Profit
WHAT DOES ALL OF THIS MEAN?
Simply put, you are running a business that converts 1 in 4 prospects into paying customers, and those customers average two purchases at £100 per purchase each year –and your company enjoys a 25% profit margin on revenues of £200,000. It also means your total profit for the year is £50,000.
So what would happen if, over the course of the next year, you could increase results by just 10% in each of the 5 areas?
Let’s do it, and then let’s take a look at what happens to your bottom line:
4,400 x 27.5% = 1210 Customers
1210 x £110 x 2.2 = £292,820 Revenue
£292,820 x 27.5% = £80,525.50 Profit
HOW A 10% INCREASE IN TOP-LINE REVENUE BECOMES A 61% INCREASE IN PROFIT
Examine the numbers closely and you’ll see the 10% increase is incremental – which means you could easily nudge numbers up by that amount over a period of months – or even weeks.
The bottom-line is that the new bottom-line looks very interesting, doesn’t it? Even though we’ve increased each factor by just 10%, we were able to boost bottom-line profit by 61% – or a total of £30,525.50. What could you do with an extra £30,000 in your business this year?
THINK 10% IS IMPRESSIVE?
Do some calculations on your own and see what the numbers look like if you increase 30%, 50% or even 100% down the line. The key is that we are multiplying factors – not adding – which has a massive impact on profit.
Contrary to those “mature” and “expert” business owners, the “5 Ways” isn’t a complicated numbers game. It’s simply looking at your business in a different way and working a set of numbers that exist in every company.
While your competitors will be in an endless cycle of trying to grow top line revenue and cutting expenses to generate more profit, you’ll have at least 5 other factors with which to work.
And there are literally hundreds of strategies you can use (all available in the ActionCOACH system) to boost those numbers immediately and over time. If you want to do some extra homework, you can work your own numbers and brainstorm ways you could increase leads, get more customers coming back, increase what and the amount they buy and raise your profit margins.
Unlike some of your old homework from your school days, however, there can be a literal and immediate payoff to your efforts – in the form of literal pounds in your pocket. Plus, you’ll be miles ahead of the majority of owners successfully operating businesses today.
Better yet, you’ll be pleasantly surprised how “mastering the numbers” is easy to do – and you’ll be more than happy with your ultimate results.
THINGS TO HELP:
If you want to know how to implement the 5 Ways to your business then get in touch, watch the video on this page. You can also download the 5 Ways Template. And if you want to see over 300 5 Ways strategies download the 5 Ways Strategy Selector.