A wiser man than me once quoted: “Turnover is vanity and profit is sanity.”

So why is it, that when senior managers at SMEs see business performance drifting off track, their immediate focus is very often on chasing new business before reviewing why profitability is actually falling?

Now don’t get me wrong. I know sales are vital, whether you are delivering products, or services. They are the lifeblood of any business, of course. But when it’s time to review profitability – and I mean take a cold, hard look at it – don’t immediately beat a path to your sales team’s door.

In this article, I explain what other factors could be affecting your profitability and what steps you should take to address them. Some might be obvious to you, others less so, but in my own experiences, this is a blueprint for any business that wants to improve profitability.

Here’s my nine-step guide to improving profitability.

1. Review purchase costs

When was the last time you reviewed the costs of any materials or services that you buy in? Have these increased since then – and how are they affecting your profitability? We always recommend putting a robust process around purchasing. This should include a regular review of suppliers so that the best price and service is achieved. Ask your accounts team to generate reports on your suppliers’ pricing history. This is useful data to have when you are meeting key suppliers – as even if prices do increase, you are demonstrating to your suppliers that you monitor their pricing seriously.

2. Review the cost of labour

This is NOT about taking an axe to your team (although I have never been afraid to address this if required – and neither should you if it is an appropriate course of action). Ask your team which parts of any process within your business are tedious time-consuming. Use this information to identify opportunities to increase productivity and improve your processes. This will also demonstrate to your team that you listen, engage with their issues and solve problems.  

3. Investigate your overheads

At any point, you should be able to see whether these are in line with the budget set at the beginning of your financial year. Review these costs monthly with your team and check that budgets are being adhered to. Create a report for your managers to show them how the business is performing against budget.

4. Check profitability for products/services

Drilling down to this level of detail will ensure that overall profitability is not being dragged down because of one offering. Remove anything that is a deadweight and losing you money.

5. Increase pricing in select markets

Yes, you CAN put prices up! Do some competitive analysis and benchmark your prices against other industry leaders and look for areas where you can increase the price. Do this in small increments so you can monitor how this affects sales. Remember, any increase here will fall straight to your bottom line so it is worth pursuing.

6. Spend time on training

Your people are your greatest asset, and normally the most costly part of your business. Developing your team will enhance performance and make the business more profitable. Many business owners do not focus enough time on their businesses conversion rate. This is where you carefully monitor the number of sales opportunities and quotations against the sales achieved. Training your team will improve the conversion ratio, in turn making the team more profitable.

7. Enhance or expand your current offering

Can you sell your product(s) in larger volumes or upsell? If products are sold in batches of ten, could this be increased to fifteen or even twenty? Are you missing the chance to upsell? Upgrading, accessorising or adding additional products and services is a great way to increase the value of each sale and improve profitability. Very often simple things like an express delivery service that has a 50% GP can add a few extra points to your bottom line.

8. Check your KPIs

Very often, sales teams have targets based on the number of trading accounts they create and manage and the sales value. But this could create a false economy for you – with additional sales of loss-making products or services! Why not think about targeting gross profit contribution? This can be done for a territory, a team or a product line. Bringing a focus to profitability within your KPI’s is a smart way of getting your team to think about the profitability of each sales opportunity.

9. Always reward good performance

Create a culture where if the business makes a profit, your staff share in that success. I’ve worked with many businesses who kept profitability a secret from their staff – and this can be a very counter-productive. If they only see sales coming in, they automatically think the business (and its senior managers) are ‘raking it in’. The best way to engage your team in thinking about profit is to make it in their interest. This also has many other side benefits, including better motivation, engagement and staff retention because they feel valued and rewarded for their efforts.