Do you want to earn more money and improve your profitability? Do you want to pay yourself a bit more? Do you want to work less hours but keep the same annual income? Then it is time to start looking at what you can do to create a more profitable business!
Profits is a fairly easy equation:
Profits = turnover – expenditure
So your profitability depends especially on the price of the product or service you deliver x how much quantity you actually sell minus the costs to produce or deliver your product or service.
Many jewellers I work with have high turnovers, but actually low profits, as their material costs (gold and silver) are so high. I see many events organisers with high turnovers, but as the people cost is so high, they often just break even.
So beyond that … what could help you to make more money from all your hard work?
What will have more impact – increasing your billable hours or invoicing your clients quicker? You will find out here! The following profitability quiz is based on a similar quiz in the book Managing the Professional Service Firm by David Maister.
Check out the list below of 16 actions that you could take to improve your profitability. Then rank each of them from 1 – 16 on what would have the quickest impact, and what would have the most permanent impact.
|Actions||Quickest Impact||Most Permanent Impact|
|a) Justify increasing your fees to your clients (e.g. become more of a specialist, innovate, add more value)|
|b) Increase your billable hours per week per person|
|c) Delegate some of your work to juniors to create or produce your work|
|d) Drop unprofitable work|
|e) Drop unprofitable clients|
|f) Invoice clients quicker|
|g) Decrease payment terms or ensure you get paid quicker|
|h) Use targeted marketing to get ‘better’ work, not just more work|
|i) Create higher value services or products that pay more|
|j) Become more efficient (i.e. eliminate duplication)|
|k) Improve your project management skills and performance|
|l) Improve your skills|
|m) Use more freelancers or contract workers to get more done or to get it done cheaper|
|n) Reduce your space and equipment costs|
|o) Reduce admin staff costs|
|p) Deal with underperforming staff|
Go on, fill in the quiz! You will get much more out of this if you actually DO it.
When you did the quiz you probably realised very quickly that your ranking for the quickest impact list is very different from the most permanent impact. If you have been trying to improve your profitability already, you probably have been focussed more on what brings in quick results than the longer term. (PS This is very normal as most people want a quick result!)
Many businesses who want to get more profitable start with minimising ‘waste’ (often overhead costs, such as stock, materials, less space, less equipment) and become more efficient (quicker invoicing, doing work quicker). Although both are important, they only have a limited impact on your overall profitability.
So what will then have an impact on my profitability?
The best thing to improve your profitability is to increase your fee levels or prices:
- Justify increasing your fees to your clients: start adding more value to your work and explain that you are now charging higher fees.
- Use targeted marketing to get ‘better’ work, not just more work.
- Improve your skills, so that you can charge more and do things quicker.
- Create higher value services or products that pay more.
You can read here another Design Trust blog post about how to increase your prices
A great practical exercise for you to try is to have a look at your client list over the last two years and identify the top 5 clients who contributed most to your turnover (e.g. got the highest invoices), but also check who contributed most to your actual profits (‘where was the ‘easy’ money?). There might be a huge difference in the two groups!
You might have clients who take up lots of your time, or your material costs (e.g. gold price!) has dramatically increased, and actually you might have run some projects on a loss. It is not uncommon that 80% of your profits come from 20% of your clients!
So two actions for you to work on:
- Identify those clients that are most profitable for you, continue working with them, and ideally get higher paid work from them!
- Identify those projects that have underperformed, what caused that under- performance (e.g. you underestimated the time it would take, the client couldn’t decide) and what you could do about that in the future.
The second best area to work on to improve your profitability is to improve your leverage:
Leverage is about being as efficient and effective with your time and materials as possible, and adding as much value as possible. The more value you can add, the better, as your fees will go up but your costs won’t. For example it won’t be any good if your business would grow by 25% but your costs would go up by the same 25%, as there would still be no increase in profitability.
People are crucial here as they are the ones that can add the most value, and are also often the highest cost for a business (or should we say ‘investment’?!). In theory the highly skilled, innovative, creative, consultative work is done by people who are paid more than people who do more repetitive work (e.g. admin). Leverage is improved when you can get lower paid people to work on projects that get higher fees.
However, this can be a great challenge for many sole traders or small businesses as you might be doing all of the work – from the specialist to the mundane!
If you are a sole trader or small business, you need to try to focus as much as possible on the higher earning work and delegate the more mundane work (to assistants, freelancers or technology).
So when you start to grow, should you take on a junior designer or somebody to do the administration?
It all depends on what you will do with your additional time, and what you can charge! If appointing a junior designer allows you to get better paid work in, and you can charge fees of 3x the rate of the junior designer than that is a great move. The issue with taking on a non-designer, it means that you need to make sure that both their AND your time are covered in multiples, as they are non-billable staff.
So back to the quiz, which actions will improve leverage?:
- Improve your project management skills and performance: become better at planning and forecasting the time it takes, become quicker in finishing jobs.
- Delegate some of your work to juniors to create or produce your work to improve the leverage.
- Use more freelancers or contract workers to get more done or to get it done cheaper
- Become more efficient e.g. plan better, eliminate duplication, minimise interruption and procrastination, do more work in the same time.
The next area to look at to improve your profitability is to fix under-performers and increase your volume:
Check out where you are under-performing and do something about it. Who are those clients and projects that are not bringing in enough money?
- Deal with under-performing staff through better management, setting goals, improving their skills
- Drop unprofitable work
- Drop unprofitable clients – those that are difficult to deal with, who can’t decide, who change their minds too many times …
- Increase your billable hours per week per person
And at last: lower your overheads:
- Invoice clients quicker
- Decrease payment terms or ensure you get paid quicker
- Reduce your space and equipment costs
- Reduce admin staff costs
Did you use this article to grow your profits? Let us know how you are getting on, or email it to somebody who might find this useful too. Add your comments or suggestions here below.