The one number you should be looking at the most
Author: Russell SmithMarch 13, 2012
If you sit me down in front of the profit and loss account and ask me to tell you how to increase your profit, I would spend 50 minutes talking about one number and 10 minutes talking about a few other numbers.
What’s the number?
Let’s suppose this is your profit and loss account:
Cost of sales £800,000
Net profit £200,000
Your goal is to double your profits. How do you do this?
Let’s suppose you focus on cutting costs so you reduce your overheads. In a £1.5 million business, could you reduce your overheads by 20% to £400,000? Maybe, although I would suggest that could be very difficult.
Could you reduce your cost of sales down to £700,000? Maybe, but it may have a direct effect on sales and off-set any cost saving.
Cutting £200,000 out of your costs would give you £400,000 and therefore double your profits but could it be done? Again, it is possible but it potentially could damage your sales and overall operational efficiency.
Let’s say you did do it though and you cut your costs by £200,000 and doubled your profits to £400,000, could you cut your costs any further? Very unlikely.
The point is this – there is a ceiling that you will hit when trying to cut costs. You may have some flab in your costs that need trimming but you can’t cut them out altogether.
The sales number on the other hand…..no ceiling! You sales are £1.5m, couldn’t you do £1.7m with the same cost base and therefore double your profits? Potentially. What could you get the sales to? As high as you want ultimately, if there is a market for what you offer. Yes, the cost of sales and then latterly, overheads will go up but at a low % than your sales are going up.
There are lots and lots of ways to increase your sales and only one real way to cut costs, hence the 50 minutes / 10 minutes ratio.
To achieve double your profits, with limited time, start with sales, there’s no ceiling and you have more options.