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By Jonathan Amponsah CTA FCCA, The Tax Guys
Are you confident that you are making the profit that you should be in your business?
When talking to entrepreneurs I often find that they are not as aware as they need to be about exactly what profit is and how to ensure they are making a profit. Let’s look at some of the ways you may be reducing your profit and how to avoid mistakes in this area.
As a business owner, you’ve heard the phrase “Cash Is King” so many times that it starts to feel like more cash means more profit. You then start to gauge the profitability of your business based on the bank balance. This is a common mistake I see so often. Here are 7 reasons why you might be making a loss in your business despite the cash in your bank account:
The above list is not exhaustive but covers the common areas where your cash will go. So, the next time your accountant presents you with accounts with less than expected profit figure, have a conversation and go through the above list together with other factors specific to your business.
This is an important indicator to profitability, but it’s vastly ignored or misunderstood among most entrepreneurs. The next time you get your accounts, take the direct costs of sales or direct expenses out from the revenue. Then divide that number by the revenue. That is your gross profit margin. Let’s say your revenue is £1,000 and your materials or direct labour or direct expenses cost you £700. The difference of £300 divided by £1,000 revenue gives you a margin of 30%. This means that for every £1 of sale, you are making 30p in gross profit. This tells you how profitable you are at the gross margin level. You can also compare this 30% to the industry average to gauge where you are at. If this margin is so low, then you’re unlikely to be making net profit because there won’t be enough to cover your overheads.
Having ascertained your profit margins of 30%, a common and huge mistake I see is as follows. You go to see a new project. You take your costs. Let’s say 1,000. What do you do next? You apply 30% to the costs. You then quote £1,300 for the job. Sounds familiar? And it makes sense, right? Well not quite. If you take your £1,000 costs from the £1300 revenue (price) you get £300. Now divide that by £1,300. You now get 23%. You’ve just lost 7% profit margin without even blinking.
And this mistake will make its way down to the net profit figure causing you to be less profitable year after year.
Having realized that you’ve been under quoting for jobs or that your costs have gone up, another classic mistake is to put off price increases for fear of losing customers. Yes, you will lose some customers but let’s do some math. Let’s say you have 20 customers and your price is £1,300 per customer, (£26,000 revenue). If you put prices up by 10%, your new revenue will £28,600. If you lose 10% of your customers (2 customers x 1,300 = £2,600), your revenue will revert to £26,000 but with two fewer customers and less resources needed to service the remaining 18 customers. And depending on how you approach the price increase and how you communicate it, you might be pleasantly surprised that less than 10% of your customers will leave.
You realize the cash at bank is not yours and that you are not making profits. So panic sets in and you’re determined to cut costs to make profits. Here’s the thing though: Not all expenses will have a greater impact on your profits. A study by McKinsey and Co (global consulting firm) revealed that whilst a 1% reduction in fixed costs can have around 2% increase in profits, the same reduction in variable costs has a bigger 7% increase in profits. So instead of going for cost cutting at all cost (no pun intended here) conduct a cost benefit analysis and focus on variable or direct costs first.
Incidentally, the same studies also revealed that increasing pricing has a bigger influence over your profits than reducing costs or increasing sales volumes.
But here is what most entrepreneurs do not consider doing: Assessing the power of a mere 1% increase in price, 1% increase in sales, 1% decrease in variable costs and 1% decrease in fixed costs.
Next time you sit down with your accountant, ask him or her to run these numbers and show you the impact it will have on your profits. Would you lose a lot of customers due to a mere 1% increase in price?
You’ve quoted a price for the job. The customer says, “what can you do about the price” Do you get a knee jerk reaction and offer a price discounts to win the work? Let’s return to the above example (on margins) where you were making 30% margin on sales of 1000. Let’s then assume you offer a 10% discount. Your revenue drops to £900 but you’ve kept your costs the same. Your margins drop to 22% (£900 less £700 divided by £900) The 10% discount now means a 26.6% drop in your margins (the original 30% less the current 22% divided by the original 30%). This is just the beginning because it gets worse if we look at the impact this will have on the bottom line (net profit margin), assuming you keep all your overheads the same. Were you intending to have a 26.6% drop in your margins by offering a 10% discount?
The point here is to be aware of the profit effect of price discounts and use it to negotiate a better win-win deal for all.
One of the biggest mistakes is not knowing the profit numbers that matter in your business. Your gross profit margin, profit per staff, profit per client or project, net profit margin, break-even number, your monthly costs and your prices are all important numbers to track and focus on. If you currently speak to your accountant once a year only to be told how much tax to pay with no access to your key numbers, then it is unlikely you will be able to improve on your results.
The good news is that with so many online accounting apps on the market, (FreeAgent, QuickBooks and Xero), entrepreneurs should no longer be flying blind in their businesses.
In his book Profit First, Mike Michalowicz makes the case for opening another bank account and transferring your profits before you make payments to anyone. So, if you’ve worked out that your net profit on every sale is 10%, then a safe way to see and secure those profits is to transfer it straight away to your “profit bank account”. That way you are forced to make do with the remaining 90%.
Review what you are doing and make changes where necessary. That way your profits will increase in future.
Jonathan Amponsah CTA FCCA is an award winning chartered accountant and tax adviser who advises entrepreneurs on business and profit improvement. Jonathan is the founder and CEO of The Tax Guys.
Filed Under:
Guest Post
Tagged as: Business, Guest Post, Jonathan Amponsah, Profit
By Mark Jennings, CEO Subba Media
Successful bands are the ones engaging with their fans. The result? They gain recognition and financial success.
The way that artists and musicians conduct their business and make money is changing dramatically in the music industry. Making valuable connections via word of mouth and keeping fans engaged is now of vital importance. And with more digital channels open to fans and musicians alike, the relationship is more direct and more measurable than ever before.
The power has begun to be handed back to fans and consumers, who are driving the conversations on social media and user generated content platforms such as TripAdvisor.
How can a business engage its fans as effectively as the top musicians and other showbiz personalities? Let’s find out.
It all starts with your core identity and aims. You need to stay grounded – and grab every opportunity to tell your story and promote what you do. And allow space for audiences to share their own stories and desires. In the music industry fan participation is the goal; giving your audience a place where they feel they have a voice and play a role in shaping your direction.
Take Lady Gaga. Her fans or ‘Little Monsters’ as they are otherwise known are made to feel like part of her entourage. They benefit from exclusive access to pre-release tracks, priority show tickets and much more. In return she receives near unconditional loyalty, and which artists (let alone brands) can claim that? Simply broadcasting and hoping for a reaction is no longer enough; audiences are bombarded with advertising messages across all their digital media usage. You need to be able to cut through the noise in the following ways:
Marketing is becoming increasingly story-led. Artists, brands and businesses need to show an authentic picture of who they there and what they stand for.
But it’s not just about your story – you need to be able to talk to your audience in a way that shows you want to listen to theirs too.
Ed Sheeran provides a good example… when your fans are getting fed-up with ticket prices, availability and secondary sales do something about it. He went out of his way to ensure tickets to his shows were only available through reputable ticket exchanges.
User generated content platforms are driving conversations between fans and artists/businesses. We’ve all seen how powerful fan communities can be on social media platforms such as Twitter, so it is important to focus on creating your own niche community around your identity.
For example, online forums of the past are evolving into more sophisticated online communities. Subba-Cultcha.com is one example of a music community that is following the model of the likes of TripAdvisor. Fans can not only upload their reviews and read others but have a place where they can buy tickets for experiences they love, all reviewed by like-minded peers whose opinions they know they can trust.
It may not be possible to respond to every comment on your page, but you should be paying attention to them all. Take the time to respond to as many as you can; the positive, the negative, the suggestions. If you are updating your site or the products you offer, share an update. Explain how audience feedback and comments helped drive your decision. If your community is not yet sharing opinions and ideas, show you want to hear from them by conducting polls and asking questions. These can be easily done on social media channels, blog posts and with email campaigns.
Sneak previews and trailers are an excellent way of giving your most enthusiastic fans a taste of what’s to come. Childish Gambino is an example of an artist who relishes fan engagement: providing sneak-peaks to new, sometimes even unfinished videos. He continually comes up with ways to whet his fans appetite and keep them engaged.
You want to incentivise your following and give them rewards for their presence – this can come in the way of competitions, exclusive first samples/listens to new products and music, follower discounts on merchandise, etc.
For example, Radiohead let their fans decide what to pay for their album ‘In Rainbows’ with their ‘pay what you want’ scheme – showing fans that they cared about them, and their relationship with them wasn’t just about the money.
Work out what is most appropriate for your business and the stage that you are at – for example if you want to increase your email database, give them an incentive to sign up, if you want to encourage more word of mouth brand ambassadors, use merchandise.
Don’t just give everything you’ve got in the hope that people will return the favor! It must be employed with restraint, and there needs to be some benefit to you. Free content and services are powerful means of showcasing what you are about and giving people the feeling of being a valuable part of the club.
For musicians it can be a difficult balancing act – open access can help you get a viral hit and a loyal following, but you have to be paid for what you produce. Whether you’re a musician or a business – remember, it’s also much harder to roll back and begin restricting access to your content when you started by giving things away for free.
There are a few big success stories of artist’s having been discovered through giving away content; Carly Ray Jepsen, Shawn Mendes and even Justin Bieber himself, but there are many more not so successful stories whereby providing free music via streaming platforms didn’t provide the big break the artist was hoping for.
In some cases it has led to a backlash, for example U2 gave away their album ‘Songs of Innocence’ free on the iPhone 6 – and it caused a massive backlash and didn’t generate the additional sales they had hoped for.
It’s the same with business, giving your product away for free doesn’t mean it will reach the masses, it just devalues the product. Ever heard the brand slogan “reassuringly expensive”?
Engagement and interaction always provide you with an opportunity to learn from your audience. There are so many ways you can use technology to understand your audience’s online behaviors – and you don’t need to employ any shady or privacy invading tactics to do so. Remember, anything you or they publish digitally is a tool to discover what your target audience responds to, enabling you to anticipate future patterns trends in more granular detail.
Some tools that will help you measure and monitor audience behavior include Google Analytics, and Amplitude, a platform that allows you to track user response trends in real time.
Ultimately data needs to be approached not just by looking at the numbers but at what is driving those numbers.
Reaching people in private inboxes helps to add to the sense of community and involvement with something bigger. In an instant message age, communications direct to a personal inbox have more resonance. People don’t want intrusion or anything with a whiff of ‘salesy-speak’, so don’t bombard them every other day with your latest offers. Do keep in regular touch with well thought-out messages telling them something you know they will be interested in.
There are excellent examples of successful companies that did without advertising budgets when they started: Airbnb, Uber, Deliveroo. Like them you can engage with your advocates, customers who share your mission. With a team of engaged cheerleaders your business will thrive.
Mark Jennings has worked in digital publishing and advertising his whole career. He previously worked in the US and UK for the Financial Times, he most recently launched the digital portfolio for Last Word Media. Mark Jennings set up Subba Media with the aim of disrupting the publishing market. Subba-cultcha.com is a fan generated music and festival reviews platform. Built from a strong loyal community, the content is produced by music fans and festival goers, enabling artists and brand sponsors to reach a new, more engaged audience.
Filed Under:
Guest Post
Tagged as: Business, Engagement, Guest Post, Mark Jennings
By Louise Palmer-Masterton, founder, Stem + Glory
From veganism to animal welfare and non-animal testing, more and more people are demanding transparency from businesses in terms of their practices and cruelty-free is having its moment.
So where do we start if we want our business to be cruelty free? The answer, as with most things, is of course with ourselves.
Even so called ‘ethical’ businesses such as ourselves are having to dig deeper into everything from supply chain to personal morals and motivations to stand up to the rigorous challenge that being truly cruelty free brings.
I had my ‘aha’ moment when I was a teenager. During a chance encounter with the Krishna movement I was introduced to the idea of compassionate eating for the first time and it made complete sense to me.
Filed Under:
Guest Post
Tagged as: Business, Cuisine, Food, Guest Post, Louise Palmer-Masterton, Vegan
By John Auckland, TribeFirst
Let’s face it, raising funding for your business can be a tough process and there’s not a lot of advice to go on. How do you create an investment deck? What’s the most appropriate language and terminology? What are investors actually looking for?
There are some rules – thankfully – when it comes to developing an investor comms strategy. Based on my experience from involvement with over 30 fundraises, I’ve created a system that’s remarkably effective.
This article covers three essential topics for effective communication with investors and funders:
Filed Under:
Guest Post
Tagged as: Communication, Guest Post, Invest, John Auckland
by Inna Kaushan, co-founder of Solna
When you’re running a business, you are most likely to be fully focused on delivering projects. There is always work demanding your time and attention. Then it is year end, you have tax returns to file, and you are scratching your head wondering where to begin.
You need two things to avoid getting muddled: accounting, and bookkeeping. These important financial processes will help you with financial control and end-of-year tax affairs. Let’s look at the differences between them and how to make the best of both in your business.
Filed Under:
Guest Post
Tagged as: Accounting, Bookkeeping, Guest Post, Inna Kaushan
By Mike Ianiri, Equinox
Change will be accelerating in business telecoms over the coming year. Here are some thoughts on how this will develop and the impact for business.
Data consumption is going to continue to climb. Stats from 2016 show 1.26Gb per user per month, increasing to 1.72Gb in 2017. Although we cannot find statistics to prove this, we believe business users are consuming more data than consumers. At the time of writing, I’ve consumed 7.1Gb of data per month, on average, over the last three months.
With the increasing cyber security threat, the use of mobile data, as opposed to Wifi, will increase dramatically. With mobile data becoming cheaper and cheaper, public Wifi is just not worth the risks it poses.
Filed Under:
Guest Post
Tagged as: Guest Post, Mike Ianiri, Phone, Technology
By Dan Whytock
It has been a long and difficult few years for the UK high street. We’ve seen many shops closing and the loss of many big-name brands, and there may be more to come.
Struggling retailers, including Marks and Spencer and Debenhams, have reported disappointing sales figures over the 2018 Christmas period.
The Internet is often seen as the ‘problem’ – particularly as more customers order goods from the comfort of their own homes and the all important footfall decreases. But, this is due to a lack of understanding of how digital works in the retail environment.
Instead, we should be asking if the Internet can be used to breathe new life into high streets and save established brands, as well as champion smaller, independent retailers. This mix is the life-blood of the high street and every UK shopping street needs to contain both.
The failure of a previous government high street initiative spearheaded by Mary Portas was mainly down to the fact that it did not have a clear and significant digital plan. Understanding the reasons why customers have, and will continue, to choose to shop online, and how bricks and mortar still play a role in the shopping experience, is the key to creating a strategy that gives customers the best of all worlds.
Filed Under:
Guest Post
Tagged as: Business, Dan Whytock, eCommerce, Guest Post
By Mike Ianiri, Equinox
When you consider how much personal data is provided by guests and held by the hotel it is no surprise that the industry attracts cyber criminals – as was discovered in November 2018 when it was reported that “500 million customers of the hotel group Marriott International have been compromised by an unauthorised party.”
Hotel hold information before a guest arrives. When they have checked in they have to submit more personal information when they connect to the hotel WiFi.
With GDPR in force now, the hospitality sector must be sure to have this at the forefront of their minds. A boutique hotel potentially would not survive a fine should a breach occur.
So, what can hotels, big and small, do to protect their guests and themselves from the unpleasant attentions of hackers and cybercriminals?
Filed Under:
Guest Post
Tagged as: Guest Post, Hotel, Marriott, Mike Ianiri, WiFi
By Amanda Hamilton, CEO of NALP
Well, Christmas may be behind us, but there is still a potential hangover if you offer goods or services to consumers that make a great Christmas gift. Although you should have done well in recent months, once the gifts have been given, there is always a chance that there is someone who doesn’t like it, or something turns out to be faulty?
So what rights do your customers have when it comes to returning items and getting a refund?
Without a receipt there is not a lot they can do but, if they’re not shy about asking for said receipt, or if the giver of your product has said they can change the item if so desired, then that’s different.
And what are your customers’ rights in relation to items that have been bought online? With many people choosing that route now, it’s not just a question of taking something back to the shop with a receipt.
Filed Under:
Guest Post
Tagged as: Amanda Hamilton, Consumer Rights, Guest Post, Legal
By John Auckland, Tribe First
After the fun of celebrating the start of another brand new year, we feel just enough optimism to make ambitious New Year’s resolutions. Experience tells us that, although we mean well, these are often abandoned by early February. I won’t tell you to give up your Netflix subscription and swap to a gym membership or to exchange your weekend drinks for the latest fashionable smoothies. What I will do is to share the key reasons why 2019 is the year you should crowdfund your business.
Filed Under:
Guest Post
Tagged as: Crowdfunding, Guest Post, John Auckland
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