Profit, what is it?
In order to understand how you can guarantee to increase your profit, you need to know what profit is. For the purposes of this article there will be no tax implications, so profit is the “amount left over” after you have taken all the income and taken the expenses from it.
How is profit calculated?
You only need to know one simple formula. It is: Sales less expenses equals profit. Okay, technically it should be gross profit but that’s another story.
For the below article, let’s get practical and add some figures. Sales = R100, expenses = R60 and the profit is R40
Garbage or truth?
Can you legally increase your profit doing exactly what you are doing now? Yes, you can. It is actually very easy and it is all based on the above formula. There are 2 ways and they are equally simple. They are both simple but can be very difficult to implement.
Number ONE
Increase sales. This is the first idea that comes to mind and often the responsibility rest solely on the sales or marketing department to do it. The targets are set higher and higher every year or quarter or month (sometimes too high) and they are pushed to get to them. This often happens with no extra incentive offered to them.
Let’s take it to the equation: Increase the sales from R100 to R130. The equation now calculates like this Sales of R130 less expenses of R60 equals R70. There may be a slight increase in expenses but they are normally small enough to ignore and are all directly related to the increase in sales. An example of this may be overtime salary payments for factory staff or the increase of commission to the sales team. Being directly related means that they are easy to keep track of.
Number TWO
Decrease expenses. This way is often overlooked. Most businesses say “we are as tight as we can go” or “we need everything we are paying for to keep the business afloat”. These are more often than not excuses that people use because they do not want to do the difficult process of looking at exactly what they are spending. It is difficult for them because they don’t know what they are spending their money on.
To the equation once more: Sales of R100 less expenses of R50 equals profit of R50.
The decrease in expenses has to be clarified here. It is easy to go in and get rid of 2 staff members and that’s it. You can do that but then your business starts to fail because you are short on staff. In running a business, there are fixed overheads that often cannot be changed. These include (but not limited to) rent, electricity and water and stock purchases. These expenses are generally a certain amount and either don’t change at all or change very slightly (up to 5% range). Although salaries would fit into those criteria, it is often excluded because it can fluctuate quite dramatically.
Sneaky expenses
The expenses we are looking to decrease are the other expenses that are not monthly or even a regular amount. Repairs and maintenance is a great example. In January you may spend R1400 but in February you only replace a door lock for R200. These expenses can be quite sneaky and creep up and up without you really noticing. A common place where costs get “out of hand” is refreshments including tea, coffee, milk and the items that make up the kitchen. Another expense is stationary. This is often abused and unfortunately not often picked up. Both of these need to be monitored and a record kept of what is bought and how often. Maybe change the tea from a premium name brand to the local store’s house brand and coffee can be very expensive. Many offices are keeping the ‘better’ coffee for visitors and the ‘not so expensive’ coffee for staff. If the staff want specific drinks – they can bring their own and keep it at their desks.
Simple but not easy
Although this can be a particularly difficult process it can reveal a large amount of money that can be saved without having to cut down on the “important” expenses such as staff salaries etc.
Making more profit can a simple task but certainly not easy. There are two ways to guarantee the increase. The best part about this is that it is right in front of you on a daily basis.
This post was updated on the 13th July 2021