One of the things that I have been focusing on for many years is exponential growth, this occurs when your focus is on three areas of the business at the same time and that is sales, gross margin and expenses.
If you can increase sales by 5% then focus on increasing your gross profit by 5% and also decrease your expenses by 5% then let’s look at what this does to your net profit and also your cash flow.
Sales…
Let’s start at the beginning, if you focus on increasing the number of customers you have and also losing less customers due to mistakes than you have last year then it’s feasible that you can increase your sales by a conservative 5% over last year.
Gross Profit…
By looking at different parts of your business and reducing waste in the purchasing of materials, reducing freight, shopping for quotes on items when you need to purchase them rather than just buying without getting any quotes, looking at your yearly quantities and reducing the number of suppliers, consolidating orders, there are so many ways to cut costs if you focus, your goal is to increase your Gross Margin by 5% let’s say your current gross margin is 50% of sales then a 5% increase will make it a 2.5% improvement your margin will go from 50% to 52.5%.
Expenses…
If you look at your entire expenses look at the line items and focus on the largest expense items first then move down the line to the next largest then the next etc.. In most cases the first item would be wages, there are so many ways to reduce this and focus on areas of waste.
Again your goal is to reduce expenses by only 5% let’s say your total expenses for the year were $800,000 so with a 5% reduction they are now $40,000 less so next year your total expenses are $760,000
Putting it all together.
Instead of spending all your time and effort into one area chasing sales then split your time into focusing on all these 3 areas and let’s see what impact this will have here is an example:
| Current | With 5% improvement. | |
| Sales | 2,000,000 | 2,100,000 |
| Gross Profit | 1,000.000 | 1,102,500 |
| Expenses | 800,000 | 760,000 |
| Net profit | 200,000 | 342,500 |
The end result is a 71.2% improvement in profit. Where else can you get this sort of return on investment? when you start to work on your business instead of in it! your results will be exponential.
There are of course additional hidden benefits, and that is the improvement in cash flow may give you the ability to take early discounts on purchases as you have more cash flow from the improvements you have made, just as one example.
The point I am making is that by focusing on 3 main areas of your business concurrently you will have an improvement that is substantially higher than the multiplication of the 3 x 5% items alone instead of 15% your result is 71%.
In preparing your business for sale ensure that you keep focus on maximizing your profit that will increase the value of the business.