How to increase Profits by 50% and Cashflow by 65%

Diagram A shows a service business which last year achieved the following results:
Sales - £1,227,000
Gross Profit- £549,000
Operating Profit (before interest and charges)- £119,000
Pre-Tax Profit - £110,000
Net Cash Flow (improvement in bank balances) - £78,000

If the same happened next year then clearly the results would be the same. What would happen if this business was able to make just small improvements of say 2% to some of its key performance indicators as follows?

2% increase to sales volume (number of individual sales made)

2% reduction in direct wages (the prime cost of sales for this service business)

2% increase in selling price

2% reduction in debtor days (the average number of days it takes to collect debts from its customers)

2% reduction in overhead costs

As you can see from the Diagram B, there will be a 50% increase in Pre-Tax profit and a 65% increase in cash flow. In this example and indeed for almost every business, the most significant constituent of the increase in profits and cash flow, is the increase in selling price.



In this business, even if all other factors were ignored and just a 2% increase in selling price was applied, the result still would still be an increase of 23% in Pre-Tax Profits and a 26% improvement in cash flow. Diagram C.


Apply only a 5% increase in selling price and this company would see their Pre-Tax Profit increase by 55%, together with a 64% improvement in their cash flow. Diagram D



So the message is, when all around you are discounting their goods and services, do not join in and fall into the trap that will seriously reduce your profits and cash flow. Instead look to get the greatest leverage from business improvement strategies that differentiate you from your competition.

This is what helps make Sobell Rhodes Chartered Accountants different.

Email different@sobellrhodes.co.uk or call 020 8429 8800.