Financial Strategy

Turnover is vanity, profit is sanity

The so-called Micawber principle, as stated by Wilkins Micawber in Charles Dickens’ novel David Copperfield, says: “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” This widely used quote on personal finance is just as relevant for business finance. For any commercial and business to be successful and sustain itself over the long term, it must make a profit, i.e. revenue must exceed costs.

Increasing profit is therefore a primary objective for businesses that are looking for sustainable growth and success. But is improving profitability as simple as increasing sales?

While increasing turnover (revenue) is important, it doesn’t necessarily lead to increased profits. Turnover simply reflects the total sales revenue generated by the business, whereas profitability focuses on the relationship between revenue and costs.

A business can increase turnover by simply selling more products or services, but if costs increase at the same rate or faster, profitability may not improve or could even decline.

So, how can you improve profits in your business?

Attract more customers

Getting more customers naturally leads to higher sales revenue. As we’ve just explained this doesn’t necessarily lead to higher profit, but it can do. An increase in revenue may not only help you to cover fixed costs but also help you to benefit from economies of scale.

For instance, where you increase the number of products you make then the average cost per unit of production decreases. This is because some of the production costs will be fixed and do not increase proportionally with the level of output. This means that the cost per sale reduces, and this leads to more profit.

Reducing lead time and increasing conversion rates can also improve profitability.

Sell more to existing customers

Acquiring new customers typically involves significant marketing and sales costs. In contrast, selling to existing customers takes fewer resources and costs because of the relationship you already have with them.  You may also be able to benefit from economies of scale.

By selling more to existing customers, you can generate additional revenue at a lower cost, thereby improving profitability.

Existing customers are often more receptive to buying additional products or services from your business, especially if they have had positive experiences in the past. As a result, you may have more flexibility in pricing and bundling products or services that gain you higher margins on those additional sales.

Upselling premium products or services, offering value-added upgrades, or introducing complementary products and services can all contribute to improving profit.

Also, consider how you might extend the average life-cycle of a typical client, perhaps by rewarding loyalty.

Raise prices

Many businesses use a strategy of pricing to undercut their competitors. However, controlling costs to a bare minimum is generally difficult for small businesses to do effectively, so a low-price strategy often leads a business to struggle.

Instead, it is usually better to focus on building up the value of what you are offering so that price becomes a secondary issue.

While you may fear losing customers by doing so, higher prices can convey a sense of premium quality, exclusivity, or value to customers.

Reduce expenses

If you can reduce expenses without affecting how much revenue the business brings in, then this will help you to earn more profit.

Think about the people you buy things from – like the ones who supply your products, materials, or even office supplies. Try talking to them to see if they’ll give you better prices or discounts. Sometimes, just by asking you can save money.  Or perhaps if you agree to buy high volumes less frequently, saving distribution costs, you can both benefit?

Look too at all the things you spend money on to run your business – like rent, electricity, or insurance. Could you shop around to find a cheaper insurance plan or try to use less electricity by turning off lights when they’re not needed?

In conclusion

Increasing profit is not the same as increasing turnover, but by exploring one of these four areas you should find a strategy that will work for you in building a business that earns you more.

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