Maximise Profitability Maximise Survival Rates

In businesses of all sizes the main driving force behind success is the company’s ability to make money.  Profitability is often the only reliable indicator of how well a business is performing, for example an SME might have an average turnover of £10 million, but that is not to say it is as profitable as it should be.  All businesses should look to maximise their profitability to ensure they have the means to grow a secure, sustainable business. 

Enterprise North East Trust warns business owners that unless they maximise their profitability they run the risk of their business failing.  Over 40% of new businesses set up in the UK each year fail within their first two years of business, due to lack of business planning and poor management.  Without systems in place to maximise profitability and to track what money is coming in and going out, business owners cannot have a clear idea on exactly what they can and cannot do within the limitations of their finances.  So it is paramount that from the offset finances are recorded and reviewed regularly

Joyce Duncan, director of operations at Enterprise North East Trust explains that profitability is often the only indicator that business owners are concerned about, as ultimately it determines how well the business is doing. “The simple fact is if a business is not making any money, then its chances of survival are slim.  We speak to many people who are keen to develop a hobby or an interest they have into a fully fledged business and make money from something they enjoy doing.  But in order to be successful there are several factors that business owners must closely monitor to ensure they get the most financially from starting their own company and that their business is in a position to maximise profitability.” 

Keeping a record of all payments, bank statements and bills will help business owners to keep track of the cash coming in and out of the business, documents such as balance sheets, sales/purchase ledgers and cashflow accounts will all assist you in determining firstly whether your business is profitable or not and then how to maximise profitability.  Tight credit control is important and keeping accurate and up-to-date accounts will help when you need to make a financial decision quickly, as you will have all of the necessary information at your fingertips. 

The main elements that business owners need to monitor at include:

Sales Tracking
On the face of it the business may appear to not be taking in that much money and in turn creating a profit, however it is necessary to look at all aspects of the business where money may be tied up.  By tracking the number of orders that have been placed, might be placed or enquiries coming in, this will give business owners an idea of the amount of money that is due to come into the business.  However, if the sales figures are not looking as promising as the business owner had anticipated, it will be worth undertaking further investigation to see why sales are so poor.  A common mistake by some businesses is to price their goods too low.  In doing so they are not taking into account that the price should cover the overheads involved in delivering the product.  Therefore the result is that although lots of products are being sold, the company isn’t actually making any money from them because the outgoing costs are not covered.

Stock Levels
If stock levels are high and orders are slow coming in then most of the business finance is tied up in unsold products.  Therefore it can be useful to implement stricter stock control methods, buying in enough stock to cope with demand.  Stock control software is used frequently in many large businesses as it gives business owners the ability to look at stock inventory at the touch of a button, and following sales the stock levels can be altered to reflect changes.  This method will ensure that the right amount of stock is in the right place at the right time.

Cashflow
In order to maximise profitability businesses need to be taking in more money than is being paid out and at roughly the same rate.  However, if money is flowing into the business slower than it is being paid out, business owners have to rely heavily on borrowing facilities.   This can cause problems for smaller businesses as they don’t have a large amount of money to spare and therefore rely heavily on their customers paying them on time.  Late payment can result in the business not being able to pay suppliers, rent, wages, rates or meet customer requirements. 

To ensure that customers’ pay on time business owners should run credit checks prior to beginning the business relationship.  Once the business relationship has been formed, the payment terms and conditions should be stated clearly from the start, in writing.   The terms can include details on price, arrangements for delivery, right to charge interest on late payments, quality and payment terms – if a credit period is not agreed, by law a default period of 30 days is set for payment. It is necessary to issue these terms to the customer before the business relationship begins. This will give the customer time to examine the terms and conditions and flag up any areas that require further clarification, before an invoice has been raised and work has commenced.  Implementing a follow up system for credit control may be worthwhile to chase late payers.  Call customers that are late with payment and issue statements and reminder invoices.  Encourage customers to pay electronically using BACS.  This offers payment certainty and reduces the risk of lost payment or bounced cheques.

Manage suppliers
Review what you are paying suppliers for your products; it may be worth shopping around to see what other deals are available to see if you can get the same product cheaper elsewhere.  Other suppliers may also be able to offer longer credit terms and volume discounts, however this must be balanced with stock holding, giving you more spare money to reinvest in the business and reduce the amount of money flowing out of the business. 

Joyce says, “As the financial environment changes on a daily basis it is vitally important that business owners have a good handle on their finances.  Many small business owners will have invested a lot of their own money to get the business up and running, so they cannot afford for the business to fail.  Therefore it is important that business owners have an awareness of the areas within their businesses that may be compromising their ability to maximise profits.  Once they are aware of the areas that may be causing problems, they will be in a position to address these issues and make changes.  As profit is the means for a business to grow, take on more staff and develop it is of paramount importance that reviews of the business finance is carried out on a regular basis.”

Enterprise business advisers provide business support and advice for more than 900 companies in the north east of Scotland each year.  For more advice on managing your finance contact Enterprise by calling 01224 289725 or visit www.enetrust.com.

Ends

For more information contact

Laura Cox
Senior Account Executive
Tricker PR
Telephone: 01224 646491
Direct: 01224 654081
Email: lcox@trickerpr.com