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Maximizing Your Profits in Two Simple Steps

financial model fixed expense gross profit margin managing expenses maximize profit profitability variable expense May 13, 2022

Your financial model and team can help you scale or plateau your business. Find out how to manage these two elements in your organization.

How often have you wondered what you could do to really start scaling your business? 

Maybe you're already operating at a good profit margin. You’re making sales, everyone’s delivering, and your customers and clients are pleased with the results.

Regardless, you’re not growing at the desired pace. You keep trying to make more sales, so you invest in marketing to bring in new clients. But the profit meter still doesn’t show signs of growth.

Unfortunately, this happens to many companies.

The good news is that following two simple steps can help you achieve impressive growth through minor incremental performance improvements.

This article will guide you through managing expenses and getting more out of your employees to maximize your profit margins.

Before we go any further, let’s first discuss your expenses. While it’s great if you can lower all of them across the board, one type of expense is more impactful on your profit.

Fixed vs. Variable Expenses

When we think about a business's financial model, three things come to mind: revenue, variable expenses, and fixed expenses.

Working out the revenue is easy enough. You don’t have to be a financial wizard to add up your sales, even when you have a diverse sales mix comprised of multiple products and services.

But the other two components of the financial model, the expenses, can cause confusion. So, here’s what you need to know:

Variable expenses are incurred costs directly related to delivering the revenue. For example, if you’re selling handcrafted dining tables, the lumber cost or cost of materials will be directly associated with delivering revenue.

Simply put, your material costs would likely also double if you want to double your revenue.

Fixed expenses are different. They don’t fluctuate up and down based on a change in revenue. However, they can change slightly due to other factors such as inflation or additional commitments your company might take on. But they’re not dependent on revenue changes.

There’s a simple reason why you have to understand the differences and keep track of these numbers – lowering your expenses is one of the fastest ways to increase profitability in your business.

Once you do that, your business starts to grow - and it will do so at the highest performing function available to your company. 

The 2 Steps

Step #1 – Tighten Your Variable Expenses

Because variable costs directly affect your gross profit margins, this is one of the most critical areas of your business to actively manage.

So, when looking at your sales mix, try to identify ways to reduce these costs. This is somewhat easier when you sell products as opposed to services. 

What do I mean?

Imagine you’re selling computers.

Making those computers means buying raw materials. Thus, one way to tighten up your expenses would be to renegotiate with your supplier. Perhaps you can score a discount if you show your interest in both scaling your business and maintaining that relationship.

Even the smallest incremental changes will increase your profit margin and help you win the game.

The same applies to your contractors or collaborators. Of course, you’ll always want to work with those who offer the best services. Your main goal is to keep your clients happy. But if you have more than one collaborator delivering the same outcome, you should choose the most cost-effective option.

Another way to tighten your variable costs is by reducing overheads and creating more accountability for your team.

Imagine working in construction. Not having proper policies and procedures concerning measurements could result in wasting a lot of material. The more waste you produce, the lower your gross profit.

Step #2 – Create Efficiency in Employees

Here’s an interesting fact about maximizing profitability:

Sometimes reducing your expenses is a matter of getting your team to perform better. It’s not always about working with the cheapest supplier or increasing your sales volume.

Team efficiency plays a huge role in your variable costs.

So, ask yourself just how well your team is working when delivering a product or service. Everyone has to be focused and driven to deliver the desired results within your organization.

Additionally, you need to keep total downtime to a minimum. Imagine working on a project and suddenly everyone stops working and waits for someone to bring in raw materials.

Simply put, the faster your team works, the quicker you can deliver the results your customers expect. And ensuring everyone is operating at peak efficiency is a matter of creating better policies and procedures.

Another way to create efficiency in your team is to identify high and low performers.

Truth is, no team is perfect. And no matter how hard you try, some will always be better than others. Moreover, after a deep team analysis, you might find that you have people performing redundant functions.

Looking at these things will help you figure out how to replace low performers with high performers. You might even work out ways to reduce labour costs and increase your gross profit margins.

In a best-case scenario, you can even create capacity. Operating at greater efficiency can enable you to take on more projects and increase your volume while maintaining the same expenses.

That’s another excellent way to significantly grow your revenue and profit.

Start Making Positive Adjustments to Increase Profitability

It doesn’t matter if you’re a service provider or sell various products to hundreds of customers. You can always increase your profitability by doing two things – reducing the cost of delivery and optimizing your team’s efficiency.

The less you have to pay to deliver the same product at the same price, the higher your profit. 

And the better your team operates, the more delivery capacity you create. As a bonus, you’ll also pay less for downtime.

But to do either of these things, you’ll need to take a good look at your numbers. Being a great business owner and making the right decisions depends on your ability to see the big picture and identify your financial model and team performance problems.

 

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