Learn to maximize your profits

Written by Colin Thompson | 12 December 2011

No matter what's happening with the economy, you can take action to become more financially successful than you have in the past. Learn how to increase your income, get out of debt, reduce your taxes and achieve financial independence.

Sales are only `one` barometer for success. Your ultimate goal is to `increase profits` in order to achieve the greatest possible return on your investment of money, time, and energy. Every customer, activity, product, or service yields a specific profit of a specific amount. In some cases, you may actually be losing money in one or more of these three areas. One of the most important things you can do for your growing business is to determine where to focus the investment of your time and money based on the return thrown off by this investment.

To truly analyze the profitability of your business, you must first examine your personal rate of return. From this personal perspective, what is your major expense? It's your time. By now, you should have developed the habit of continually asking yourself this basic question: Would I pay someone else my hourly rate to perform this task? If not, you are failing to maximise the return on your time. In other words, you are investing your time in an area that yields less than the optimum rate of return. You are incurring a "loss of opportunity" cost. This, in turn, affects the overall profitability of your business.

One of the largest expense items for most businesses is payroll. As a business grows, it typically hires additional staff according to the most pressing need at the moment. Once a person has been hired, often she or he can become a permanent fixture, even when the company's needs change. Many entrepreneurs are too busy creating products, designing services, and generating revenues to pay close attention to employee performance. Over time, the result can be an inefficient and ineffective staff and a bloated payroll.

Some customers are more profitable than others; some may actually be costing you money. Can you identify your most profitable customers? Do you know any who are unprofitable? There is not necessarily any connection between the size of the customer or the volume of business he produces and his profitability. There are several questions you should ask as you examine your customers’ profitability: How often does each customer purchase from you? What is the average size of each purchase? What is the profit margin of the product(s) purchased? How much time is spent providing customer service after the sale? What is the "product returns" record of each customer?

Concentrate on profitable customers. Many companies regularly “fire” the top 10 percent of their customers. They stop doing business with those who generate the least revenues or yield the lowest on their return purchases, choosing to concentrate on their more profitable customers and attracting more like them. At the very least, be diligent in rooting out those customers who actually cost you money—regardless of the revenues they generate. You cannot afford to carry this unprofitable load.

Therefore I leave you with this thought for the New Year: Learn to identify your most and your least profitable customers and learn to focus on only the most profitable.

Colin Thompson
colin@cavendish-mr.org.uk