Growing sales is an obvious goal for most businesses. But higher turnover doesn’t necessarily mean higher profits.
A business can increase its sales while seeing little improvement in its bottom line if margins are squeezed, costs rise or resources are focused on less profitable products, services or customers.
That’s why a 12-month profit improvement plan can be such a valuable management tool. It allows you to understand what is driving your profitability, identify opportunities for improvement and turn those findings into practical actions.
Start with where you are now
Before deciding where you want the business to go, it’s important to understand its current financial position.
Your analysis should consider areas such as:
- Sales by product or service.
- Gross profit generated by each revenue stream.
- Profitability by customer.
- Overheads and operating costs.
- Overall net profit.
This can reveal some surprising differences. A product, service or customer that generates significant revenue may not necessarily be contributing much to your overall profit.
Identifying these differences gives you a clearer picture of where improvements could have the biggest impact.
Don’t just look at what has happened
Your accounts tell you what happened in the past. A profit improvement plan should also help you consider what could happen in the future.
Scenario planning can help you test different strategies and see how they might affect your bottom line.
For example:
- What would happen if sales increased by 10%?
- What impact would a modest price increase have?
- How much additional profit could a 2% improvement in gross margin generate?
- Would focusing more heavily on higher-margin products or services improve profitability?
- What would happen if you stopped offering products or services that consistently generate low margins?
By modelling different combinations of sales and margin improvements, you can identify which strategies are likely to deliver the greatest return.
Small margin improvements can make a big difference
It’s easy to assume that increasing sales is the quickest route to greater profits. However, improving your gross profit margin can sometimes be just as powerful — or even more so.
For example, imagine your business generates £1 million in annual sales with a 30% gross profit margin.
A 10% increase in sales would take turnover to £1.1 million and gross profit to £330,000, assuming the margin remains unchanged.
But if sales stay at £1 million and you improve your gross profit margin from 30% to 33%, your gross profit would also increase to £330,000.
Improve both sales and margins, and the potential impact on profitability becomes even greater.
Turn your numbers into action
A profit improvement plan is only useful if it leads to action.
Depending on what your analysis reveals, your objectives could include:
Increasing sales
- Strengthening relationships with existing customers.
- Improving customer retention.
- Exploring new markets.
- Expanding higher-margin products or services.
Improving margins
- Reviewing your pricing strategy.
- Reducing unnecessary discounts.
- Negotiating better supplier terms.
- Improving operational efficiency.
Optimising your product and service mix
- Focusing more resources on your most profitable revenue streams.
- Reviewing underperforming products and services.
- Reducing or removing activities that deliver poor returns.
Keep reviewing your plan
Your profit improvement plan shouldn’t sit in a drawer for the next 12 months.
Regularly comparing actual performance against your targets will help you identify what is working, where changes are needed and which initiatives aren’t delivering the expected results.
If something isn’t working, you can adapt your approach rather than continuing to invest time and money in an ineffective strategy.
Make growth more profitable
Improving profitability is rarely about one dramatic change. More often, it comes from making a series of informed decisions that gradually strengthen the financial performance of the business.
A structured 12-month plan gives you a clearer roadmap. By understanding your current margins, identifying your most profitable areas and modelling different scenarios, you can make more confident decisions about where to focus your time and resources.
Would you like to improve your business’s profitability over the next 12 months?
Our London-based accountancy team can help you analyse the numbers, identify opportunities and put together a practical profit improvement plan.
Get in touch with us today to find out how we can help.
