£1 coins

5 ‘common sense’ ways to increase profit margins

Paul Green Uncategorized

The goal of your business is not turnover. Turnover is vanity. Profit is sanity (and cash is reality, to finish the saying).

How efficient is your business at turning turnover into profit? IT support has a lot of fixed costs just to be in business, which can be a real margins killer.

I did a Discovery Day with a client a few weeks ago, who had a high turnover but very poor profit margins. We spent a few hours planning how to make that business more efficient – so more of the money dropped to the bottom line.

The more profitable your business, the easier (and better) your life will be. And your business will be more robust, and easier to sell when you come to exit.

Here are five “common sense” ways to improve profit margins today.

1) Increase prices

A no brainer, yet one many business owners struggle to implement. Why? Because of fear.

Fear that higher prices will drive complaints up, and clients away.

Doubling the price might do that. But a 5% rise won’t. Yet it will have a dramatic effect on your bottom line.

It’s estimated that an increase in average selling price of 5% increases net profit by an average of 22%.

And in a non-commodity market, a 5% increase is not particularly visible. Psychologically, there is little difference between £95 and £99.

At the very least, you should increase your prices for new clients. Do it now. Prices for the existing clients can be nudged up at a later date.

2) Never discount

Discounting kills margins, and sets the client’s expectations that you are “cheap”. Never do it.

What you can do instead is add value. Give them something extra.

If you take £50 off the price, you lose £50 of valuable cash.

If you add £50 of value instead, your cost of delivery that is likely to be a lot less than £50.

3) Stop being a bank

If your clients pay their bills late, then they are treating you like a bank instead of an IT support company.

Frankly, I don’t think they should even have 30 days to pay. Get them to pay up front by Direct Debit, at the start of the month.

They don’t pay? Then you don’t deliver. The simplest form of credit control there is.

OK, your existing clients might moan about a new arrangement like this (might moan). But new clients won’t. Just tell them it’s the way you do business. End of story.

4) Renegotiate with suppliers

Those who ask get deals.

This is as true for services, as it is for commodity products such as the utilities, and equipment.

So ask. At every contract renewal date, ask for best price. Make it company policy not to sign unless you get a deal.

5) Ensure you are maximising all of your existing capacity before you add more

Your staff are rarely as busy as they tell you they are.

Sure, they might look busy. But employees tend to increase the amount of work to fill the time available.

So as you add a few new clients, they whinge and moan about how much there is to do.

Don’t judge the business’s capacity on their opinions. Judge it by Key Performance Indicators, and time spent with them on the job.

Often, when you cut down on pointless chatting, interruptions , Facebook and lengthy tea breaks, you find there’s plenty of spare capacity within the business.