In this fifth in a series of articles about how to put together your business plan for 2017, we’re going to pause and focus on 5 strategies that will help you to get to your breakeven point quicker. As I explained in my last article, Why Hitting Breakeven Point Is Critical To Business Success, businesses are in a race against time. If we don’t hit breakeven point as quickly as possible, our expenses will sink our business before we’ve made enough net revenue to catch up.
I’m currently working with three businesses in turnaround, one of which came to me recently on life support. Every month expenses far exceed net revenue to the point that the owner hit a cash flow crunch. The only way this business will survive is if it keeps expenses as low as possible, for as long as possible, whilst dramatically making itself more profitable. Fast. In this instance, we’ve been able to reduce the losses by 50% by taking immediate, targeted action. And as sales are picking up, this trend will continue. This business is in no way out of the woods. But we’ve started to stem the tide.
Keeping in mind that all businesses are in a race against time until they hit that all important breakeven point, here are 5 strategies that will help you get to ‘sleep easy at night’ point sooner rather than later, and there are encouraging signs of recovery.
1. Raise Gross Margin By Lowering The Cost Of Goods Sold
For any business to be profitable, gross margin must be at least 30% of net revenue. That means COGS must be 70% or lower. Or put another way for every pound you make in sales, the direct costs of making your product must be 70p or less. Check whether your retail price meets this rule of thumb by marking up the COGS (direct costs) by 45%. Remember this mantra:
Your retail price should be no lower than COGS plus 45% of COGS.
Clearly, if your gross margin is 30% or thereabouts, you won’t have a lot of money to pay for your business overheads, including your own salary. So much sure it’s as high as it can possibly be by reducing how much it costs you to make your product. If we take my cupcake example from Why Hitting Breakeven Point Is Critical To Business Success, you could achieve this by reducing the cost of ingredients, perhaps by negotiating better terms with your suppliers or using a cheaper brand.
For businesses trading abroad, it’s important to take into account currency fluctuations. Just this week, Rivington Biscuits – which makes my favourite pink wafers – announced that it is going into administration. This is because the value of the pound dropped sharply after the Brexit vote making the cost of ingredients, which it buys from Europe, more expensive. The combination of rising costs coupled with difficult trading conditions means the company has run out of cash.
2. Raise Gross Margin By Increasing Your Prices
While you want to get the cost of making your products as low as possible, without compromising quality, you also want to charge the maximum price you can. This will create more gross margin. Let’s say it costs me £5 to manufacture a sheet. If it retails for £20, my gross margin is £15. But if I could charge £30 instead, my gross margin would be £25. If I normally sell 10,000 sheets a year, my gross margin would jump from £150,000 to £250,000. Think how much difference an additional £100,000 would make to my business.
3. Reduce Fixed and Variable Costs
The third way of increasing gross margin is to cut fixed and variable overheads. This could mean relocating premises to reduce rent, or renegotiate lease agreements to get better rates. Before British Home Stores went out of business, it renegotiated rents in a last ditch effort to drive down costs. Landlords were willing to agree to this because the alternative, large, empty premises on the High Street, was worse.
As salaries is usually the biggest expense, look at how these can be reduced. Reducing your salary. Converting staff to part time. Making staff redundant which I appreciate is not an easy option. But the alternative, going bust, is far, far worse.
Look at all your other fixed and variable expenses to determine (a) whether they’re necessary at all and (b) if the cost can be re-negotiated and reduced.
4. Focus On Profitable Customers Who Are Loyal To Your Business
There are two key reasons for focusing on your most profitable and most loyal customers. First, because they love your brand, they tend to buy more. This has the effect of increasing net revenue. And second, they are more likely to recommend you to their own social and professional networks. Customer recommendation is one of the most effective sales methods, and even better, it’s free.
5. Focus On Your Most Profitable Products
I’m working with a client who has a chain of cafes. Mark up in this industry is typically three to four times COGS. So if vanilla cupcakes are more profitable than chocolate brownies for example (likely because of the cost of the chocolate and nuts) it would make business sense for the owner to focus her efforts on selling vanilla cupcakes.
Crunch your numbers to work out which of your products and services are most profitable. Then select those products that are popular with your customers and promote these. That way you’ll increase both profits and volume.
Remember to keep an eye on your breakeven point because it can change. This might not be a problem for your business when economic times are good. But here in the UK, our economy is weakening. Unemployment will rise, making it more challenging to find customers willing and able to buy products. You can start preparing for this now by reading my article, Marketing In A Weak Economy.
CLICK HERE to start planning your 2017 business budget and map out your financial plan for the year ahead.[/callout
Join The Conversation
Question: How can you apply these strategies to your business? I love reading your feedback so please do reply using the comments box below.
Explore These Additional Resources
Did you miss?
- Why Hitting Breakeven Point Is Critical To Business Success
- Understanding Business Growth Strategy
- How To Prepare A Sales Forecast – Part 1
- How To Prepare A Sales Forecast – Part 2
- Marketing In A Weak Economy
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I’m Denyse Whillier, a London based business coach and consultant. I guide entrepreneurs from across the globe to achieve profitable, scaleable growth and create businesses that are Built To Succeed™. Built To Succeed™ is my proven success system, developed during my 8 years in the trenches as a CEO, 25 years’ experience at senior leadership and managerial level and training at Cranfield School of Management, the UK’s leading business school. It’s this background that sets me apart and helps my clients to get BIG results.
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