If you want to make more money in your business, you have to sell more, right? Not necessarily.
Increasing sales is great, if you can manage it, but it isn’t always your best path to higher profitability.
On this episode I’m showing you how to increase your profit margin and the overall value of your business without extra sales. Using a simple example, we’ll walk through a small tweak you can make that will have exponential benefit to your business.
It’s Not All About Increased Sales
A natural assumption I often hear is that to increase profitability and make more money, you have to sell more. But this isn’t always a feasible option, or even the best option. Let’s look at an example.
You may not be a numbers person, but stay with me here. If we use an example of a business with $1000 that has a 45% cost of goods, 25% marketing cost and $250 fixed salaries, you have a net profit of $50, or a 5% profit margin.
When your sales increase, the percentage costs increase with them. So in order to increase your profit to $100, or a 10% margin, you would need to up your sales by 17%. For some businesses, that is prohibitive.
But, if you take a look at your expenses, and get the marketing percentage down to 20%, you can up your bottom line to the same 10% margin.
In other words, if you lower your cost to acquire and convert a customer, you make more money. If you know your target market, understand your customer and what they want, you should be able to shave off marketing expenses.
“Paying attention to the numbers, knowing the details, can have a huge impact on your bottom line.”
Take Time to Look at the Numbers
If you want to increase your margins, don’t automatically jump to sales. Take the time to sit down and look at the numbers.
- What are you actually spending money on?
- Can you do anything more efficiently?
- Are you paying for things that you don’t need or no longer serve your business?
“Take time to look at your expense lines and look at what you’re spending money on.”
Looking at Your Business Like an Investor
As I mentioned in episode 8, you want to look at your business like an investor, or potential buyer.
- Profit margin percentage is often the number that the multiple gets paid on by a buyer.
- Increasing your profit margin by 5% may jump the value of your business by 2, 3, or even 10 times.
- The simple adjustment of shaving your costs increases the overall value of your business exponentially.
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