A common concern we've seen at one point or another from many business owners, particularly as they look to scale is that they don't feel as though they're getting the return they expect for their efforts.
A business might see its revenue double or triple over a certain period of time, but it doesn't always equate to the same performance at the profit level.
The simple answer to this might be that the business is simply not charging enough for their service, or costs are too high and there is no scope to increase the price in that particular market. So how do we find that optimal middle ground?
There are three steps involved and it starts with analysing your costs.
Step 1 - Review Unnecessary and Overpriced Overhead Spending
The first step involves reviewing your overheads for any unnecessary spending or overpriced services that could be cheaper.
Overheads refer to costs that are NOT directly related to generating sales income but are rather incidental to running the business e.g., renting a space to run the business out of, program subscriptions, professional service fees as required, admin staff wages etc.
A business is a time-consuming obligation and so finding time to review every single transaction and spend can be difficult. Particularly as a business is growing, the number of daily transactions will naturally grow along with it, and this can result in a lot of small recurring costs going unnoticed.
And whilst they might be small, over time they can mount up to a significant amount of spending if left unchecked.
Once identified, unnecessary costs can then be cut, overpriced costs negotiated with suppliers, or a market alternative sought out instead.
Step 2 - Identify and Understand the Direct Costs of Providing your Service
The second step requires the identification of the costs that vary directly in line with the volume of work being performed by the business.
That is to say, if the business wants to grow its revenue, these costs will also need to increase.
Let's look at a few examples of what this might be to different businesses:
Manufacturing Business - The cost of the raw materials required to create the product. If the business wants to sell more product, it needs to make more product and therefore buy more materials.
Retail Business - The amount of stock it purchases would need to increase along with sales.
Service Business (lawyer, doctor, therapist etc.) - The cost of staff who perform the services that generate the business income.
Logistics Business - The ongoing running cost of the trucks required to complete deliveries, and the wages of the staff required to drive them.
As you can see, it is not a one size fits all approach as the direct costs vary business to business.
With this information, we can now look at pricing/sales as the third step.
Step 3 - Determine the Required Pricing/Volume of Services
Once identified, you can use this information to determine what you would need to price your services at and the volume of work you would need to complete at that price to meet your desired financial goals for the business.
You would firstly need to review the current volume of work being completed annually and the prices for the services/products being provided.
We can compare this with the direct costs of the business to work out what the businesses gross profit is.
Gross profit can be defined as the initial margin made on the service/product being offered.
Subtracting the expected overheads from the gross profit figure then gives you the net profit for the business.
Once these current figures have been determined, you can then analyse the potential 'what if scenarios' that might be applicable to you such as increasing pricing, increasing volume or perhaps culling a number of costs, and the effect that each of these has on the end financial result of the business.
Keeping practicality in mind, through trial and error adjusting the price and volume, this can then create a desired tangible goal that if reached, should align with the goals of the business to achieve financial success.
If the adjustment is in anyway volume related, this should then prompt you to explore different ways to increase output where possible, besides just increasing the number of staff.
This might include making the process from start to finish more efficient, bringing in a new program or software to simplify a process or setting targets for staff to meet in order to ensure that they are not only covering the cost of their employment but also returning a profit to you for their work.
Some time will need to be put aside to undertake this process but more often than not, it can be a game changer for a lot of businesses, allowing them to realign themselves to their financial goals and get back on the path to success.
If you would like to enquire with myself or my business partner Benjamin Audino about how we can assist you in undertaking a costing analysis and the other services we offer, you may do so from the contact page of our website or by emailing your enquiry to enquiries@jetaa.com.au.
Written by Jayden Hamer
