Making big changes to your business can sometimes seem daunting, and can have unplanned consequences – for example, if you increase prices by 10% but lose 10% or more of your customers, you’ll be worse off (but you’re no worse off if you only lose 9% of your customers).
Those are drastic steps for a small business owner, but making just very small changes right across your business can have a massive compound effect, as this very simplified scenario shows:
Say a business has 100 customers. Each customer buys one product from the business for £250, once a year. The gross profit margin is 30%, and overheads are £5,000 per annum.
The profit and loss account will look like this:
| Sales (100 x 1 x £250 x 1) | £25,000 |
| Gross profit 30% | £7,500 |
| Overheads | £5,000 |
| Net profit | £2,500 |
The business owner wants to grow the business and comes to us for advice on the best way to achieve that. We start by looking at the customer base, and suggest that they try to grow it by, say, 10% per annum, but the owner counters that they are a long-established business and he doesn’t think there are that many potential new customers out there.
So we move on to prices. If you can’t get more customers, how about increasing your prices by say 10%? “O no, if we increase prices we’ll lose customers!” And so on. Any significant improvement looks too difficult or impractical.
So we try a different tack. “Do you think you could improve on each element of the business by an average of just 1%?” “Yes, that sounds easy enough. But would 1% make much difference?”
Let’s see how that changes the figures:
Sales (101 x 1.01 x £252.50 x 1.01) | £26,015 |
| Gross profit 30.3% | £7,882 |
| Overheads | £4,950 |
| Net profit | £2,932 |
As this demonstrates, even small changes can add up to a big improvement in profit. That’s the magic of compounding.
If you’d like to talk to us about how we can help you improve your business profits, get in touch now.
