NEWS

How to break through a profit plateau

August 22, 2022
Image


BSc FCA, Audit Partner
East London



How to break through a profit plateau



NEWS

How to break through a profit plateau

Image


BSc FCA, Audit Partner
East London


Many businesses can hit a profit plateau at different stages of their growth and business lifecycle. As a business owner, working out how to break through a profit plateau and increase profits ongoing can be tough. Expecting constant growth and growing profit margins continually may not be sustainable.

For business owners working out in their business how to break through a profit plateau can mean looking at several areas including increasing revenue generation, controlling overheads, diversifying product lines, improving management information, finding better customers or boosting efficiency.

Increasing business profits

So, what can you do if your exponential growth suddenly stops and you hit a profit plateau? If your profits are starting to flatline, then read on. We will cover in this blog some ideas on how to break through a profit plateau and turn that plateau into a peak.

Have a profit strategy

It’s not enough to go on a hunch when it comes to improving profits. Hunting down and increasing profits requires a clear strategy.

Understand your profit drivers

To find out how to improve profits, it’s important you understand the profit drivers in your business. By understanding these and modelling accordingly you’ll see how sometimes small changes could boost your profit significantly.

Every business will have different things that will drive business profit. You need to identify those key profit drivers and from there set key performance indicators (KPIs).

The importance of up-to-date management information

Having up to date management information is paramount to understanding your profit margins. You will need detailed and up to date management information on profits per product or service line and profit per customer.

This type of regular management information is likely to yield some surprising results. Quite often you biggest customer may not be the one that brings in the biggest profits. Perhaps you offer them a discount, short lead times or attractive payment terms to retain them, but these measures eat into your profit margin.

Up-to-date management information can help a business owner target inefficiencies and where losses are occurring and enables you to then tackle these areas.

Once you have regular, accurate and up-to-date management information, there is a lot you can do to improve your profit margins and break the profit plateau.

Find the right types of customers

If you are discounting for larger customers or offering better terms, then they may not be your most profitable customers. Finding the right customer is about getting a balance between the profit you can generate and the terms of the business.

You should know who your best customers are, what they buy and when they buy it.

You can categorise your customers and the products or services they buy into one of four categories:

  • high sales and high profit
  • high sales and low profit
  • low sales and high profit
  • low sales and low profit

You can also significantly boost your profitability by nurturing customers that provide high profit on low sales.

You may find your largest customer is too demanding. Increasing prices or considering longer term if you want to continue to do business with them can be a tough decision to make. However, having a plan to fill that space with smaller more profitable customers who value you and are willing to pay a better price, may well improve your profits longer term.

Examine your customer journey

Your customer experience and the detail of your customer sales process from start to finish is key to breaking through a profit plateau. A consistently high-quality experience can have a huge impact on growth and profits.

You need to shape a diverse customer journey that educates your customer on the value of your offering to enable you to charge more and additional products that can benefit them throughout the journey to generate more revenue.

A highly tuned customer experience and customer journey that is implemented effectively will maximise the conversion rate, cross-selling opportunities and will generate more revenue and profit.

Increasing sales & increasing transaction value

There are two key strategies for boosting profitability through sales; selling more to existing profitable customers and finding similar customers to sell to.

Upping the number of sales your business makes (with the right types of profitable customers) and increasing value per transaction can also help to improve profits, if you are clear on the customers and products / services that earn you the most profit.

Manage your costs

This is often the first place business owners turn to increase profits, however, be cautious as it is not always the root cause of your profit plateau. Many businesses can find some wastage that they can reduce but be careful not to cut too hard as that may jeopardise future growth and investment.

Look at your key cost areas

Suppliers

Consider whether you are getting the best prices from suppliers. Can you negotiate better terms, or do you need to change supplier? Use your buying power or status as a valued customer to agree longer term contracts to secure better prices. Maybe you can cut supplier numbers to increase buying power. However, don’t become over reliant on one supplier.

Finance

Review your finance facilities, look for more competitive terms and make sure you are using different types of finance effectively.

Premises

Are you using all your space effectively? Could you sublet space, reduce space or re-negotiate leases?

Production

Consider if you can streamline and adapt production processes. Step back on a regular basis and question whether there are more efficient ways to produce or deliver your products or services.

Maybe outsourcing could be an option or investing in new plant and machinery could in the long term cut production costs or wastage.

Product diversification

Many businesses aren’t fully aware which of their products and customers generate the highest proportion of profits. Analysing your profit margins per product needs to be undertaken.

If you are considering product or market diversification do your research first. Look at the market, pricing and customer needs.

Developing complementary products, services or add-ons for your existing customers could prove profitable. It’s far easier to sell additional products or services to existing customers than gain new customers.

Develop products or services to satisfy customers additional needs and alleviate their challenges and pain points.

Developing new products could also give you the perfect opportunity to increase prices by creating bundles of products or added value services.

Market diversification

Moving into new market areas can transform a business and if handled correctly, can significantly increase your profitability. However, expanding into new markets can be risky – and mistakes can prove very expensive.

Before you start, carefully research the potential opportunity. Can you tailor or adapt existing products or services for new markets to minimise risk and costs?

Assess your team and yourself

Once you’ve identified your profit drivers and have a plan to improve profits, it can often be your own team that hinder the growth and the profit improvement you want to achieve.

Assess your management team and management culture to see if they are up to the job. Set them profit and growth targets and make them accountable.

It’s also key for a business owner to hold a mirror up and assess their own capabilities. Is it your own capabilities or inability to let go that is hindering business growth expectations and profit maximisation? Is now the time to build a bigger or better management team and for you to step back and focus on the business strategy and drive ongoing growth?

Summary

When your business hits a profit plateau or sales plateau you need to step back and assess the key profit drivers in your business and be prepared to make changes to break through the profit plateau.

Really dynamic businesses will have a growth and profit strategy, up to date and accurate management information, well planned customer journeys, clear internal processes, a solid offering, management of costs and a strong sales team or function.

Breaking through a profit plateau can often be about stimulating different results by taking new action.

Choosing to be dynamic about your approach to business may be the thing that propels your business to the next level of growth and profit.

If your business has hit a profit plateau and you need some advice and support about how to overcome this and increase your profits, then contact us today.

We believe we are more than just your average accountancy firm. Our goal at Barnes Roffe is to engage our clients through a proactive relationship, which provides you with the resources and tools you need to enable you to take charge of your finances with confidence.

Tax news, audit news and any new accounting news ... with the help of our topical tips, blogs and key guides you can enjoy the benefit of being regularly informed of business and accounting updates which are likely to be relevant to you and your business.

PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.