In any business there are three possible ways to improve profit, these are:

  1. Increase sales volume
  2. Raise selling prices
  3. Reduce costs

If the outputs of your business are services rather than physical products, this can be restated as:

  • Increase the quantity of services provided
  • Raise unit charges, for example hourly fee rates.

Sometimes marketers use more sophisticated terms than these, for example, they may refer to:

  • Changing the product mix
  • Altering the gross profit mix of product range
  • Changing the customer mix

But each of these variations are the three basic strategies to improve profit.

Why not just lower prices?

Stagnant or shrinking markets could be characterized by intense competition. Many businesses operate in these markets by trying to maintain or increase their sales volumes by lowering their selling prices to meet competition. This in turn reduces the gross margin on every product sold.

For example, in Table 1 the first column shows a profit plan for one year, assuming a selling price of $10 per unit sold.

The second column is an alternative plan showing what the business hopes to achieve in the same year, but this time with the selling price per unit reduced by 10% to $9 to meet the competition.

Screen Shot 2015-12-30 at 2.50.27 PM

If your business consists of service products rather than physical products, then the unit price shown in the tables will need to be converted to Service hours charged.

In practice however, the strategy of lowering and selling prices is very dangerous.

1. Little volume increase:
In an intensely competitive market situation it is most likely that competitors are also reducing their selling prices. That is a price war in progress.

Accordingly, instead of increasing sales by 15,000 units as in the second column of table 1, it is probable that the business will achieve little if any increase in volume as a result of reducing its prices by 10%.

2. Indirect costs increases:
In table 1 it is assumed that indirect costs will remain constant at $200,000 when unit volume increases by 15,000 units. In practice however, an increase in volume cannot rarely be achieved without a greater input of indirect costs. This is particularly so in a highly competitive market.

For example, extra expenditure will be required on items such as advertising and other promotional costs, salesmen's commission and salaries and distribution costs.

These projected factors have been built into table 2 where it is assumed that the following events what occur if the business reduced it selling price by 10%:

1. Sales volume would rise buy 4% from 50,000 to 52,000 units.
2. Indirect costs would rise by 5% from $200,000 two $210,000 as a result of the greater input required to achieve the 4% increase in sales volume in the highly competitive market which the business operates.

The numbers in the second column of table 2 are indicative of the disastrous results of a business which reduces selling prices in a bid to increase sales volume, while operating in a highly competitive market.

Screen Shot 2015-12-30 at 2.50.39 PM
Further problems caused by inflation:
At this point we also need to consider the further the complications caused by inflation. In a high inflation situation both the direct and indirect cost of the business (as shown in table 1 and table 2) will typically be increasing.

These increased costs can be financed from two possible sources, these are:
1. Net profits earned by the business
2. Cash injection from outside borrowings

But as shown in the second column of table 2, lowering selling prices in a competitive market situation reduces net profit. Table 2 shows that the business would have made a net loss of $2,000 if prices had been reduced by 10%. In these circumstances the business would need to borrow more funds from outside sources to finance increases in operating costs in the following year.

A business which attempts to maintain or increase volume by reducing selling prices in an intensely competitive/ high inflation situation may suddenly find it has little if any net profit remaining.

Alternatives to lowering prices:
The three methods you can use to rise the net profit of your business, are therefore:
1. Increase sales volume
2. Raise selling prices
3. Reduce costs

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PS: Be sure to see our related blog -  “"Did you know that break-even is a widely misunderstood calculation"


Here's a quick and easy way to calculate the break-even point for your business, and a FREE download tool to calculate your own break-even!

There can be many complex methods that require charts to decide the break-even for a business. Whilst this may be required for medium to large manufacturing operations with a complex array of products to monitor on an ongoing basis, for most of us we just require a quick and dirty way to calculate break-even.

Also did you know that by tweaking the break-even formula we can set a desired profit level for our business? More on this in a moment.

Break-even is a point when a business sells a certain number of units that cover all business expenses (note: – the business has not made a profit at this point). These units can be products or items of service. We will cover this process for a service-based business in our next newsletter issue so stay tuned for this!

So here goes, break even is the volume of sales (or sales dollars) required to cover fixed expenses (overheads).

The Process: (1) Sales – cost of goods = gross profit (GP), (2) GP/sales = GP% (margin). As I said earlier there are many long-winded ways to explain break-even, here is a quick and easy way to calculate this.

Here is an everyday Profit & Loss Report snapshot:

_Table 1 PIX 2

What you do here is look at 2-areas, fixed costs and gross profit % to sales. Remember here that the % cost of goods sold will remain the same, as of course does the $ value of the fixed costs.

So then divide the fixed costs by the gross profit (0.40), then you get 30,000/0.4 = $75,000 and this is the level of sales required to break even.

This means that at the sales level of $75,000 there is 0 (zero) profit dollars as can be seen in the revised profit & loss report (table 2) below.

_Table 2 PIX 2

Note: Gross profit is sometimes referred to as contribution margin. This is because it contributes towards the operating costs (overheads or fixed costs) of the business.

Force net profit: This is a really cool way to calculate your desired net profit, using part of the same formula that we just used for establishing break even. And I have a great Free tool for you to help you do this (see the bottom of the page).

So we know to find the break-even value using the examples in Table 1 and Table 2 above. First we need to look again at our break-even result in Table 2.

We know the following:

% cost of goods sold (this does not change) see 2 in table 2.
% gross profit (this does not change) see 3 in table 2.
Value of fixed costs = $30,000 (this does not change) see 4 in table 2.
So to calculate your desired net profit simply add this value to the break-even formula, as follows, say you want to achieve $15,000 net profit for your business, the force net profit formula is:

= fixed costs + desired net profit value/gross profit %

= 30,000 + 15,000/0.4

= 45,000/0.4 = 112,500

So to achieve a desired net profit of $15,000, you therefore, need sales of $112,500.

Refer to table 3 below.

_Table 3 PIX 2

Download the break-even & force profit calculator

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Before you start:

  • Gather the necessary material and arrange it in a logical sequence.
  • For best results, maintain a content theme and format by using common borders page layouts and colors.
  • Ensure the correct placement and usage of the company logo, if applicable.
  • Most people only absorb about three key points from a speech.
  • What about those key points and how are they best communicated visually?
  • Remember that the visuals are used to emphasize important points, not to reproduce the speaker's notes.
  • Illustrate one topic per slide.

Determine your objective, are you instructing, informing or selling a product or idea?

  • Choose a font that is easily comprehended and large enough to be seen.
  • Do not use capitals. Upper and lower case is more easily comprehended.
  • Limit copy to 6 lines maximum per slide and 6-7 words per line.
  • Use the titles to make a statement, but keep them short.
  • Use a larger font font for the slide title, 36-point is the minimum.
  • Use color to highlight important points and add interest.
  • Use complimentary colors.

Consider the impact of different colors.

- Blue portrays calm and quiet, gives a positive feeling and is ideal for the background.
- Red is related to danger, alertness and problems, use it sparingly.
- Green is seen as restful, cool and assured.
- Yellow is warm and vibrant, it gives a feeling of energy.
- Use tinted backgrounds to reduce glare and aid concentration.
- Use light colors for text and for emphasis.
- The best text colors are white, light green, light blue etc.
- The eye is naturally drawn to yellow.
- More than 4 feature colors, including the background, can reduce comprehension.
- Use illustrations and diagrams that are relevant.
- Use symbols to draw attention to important points.
- Use dark colors for background and avoid gaudiness.
- Use color, rather than underlines, to make important points stand out.
- Avoid overuse of italics, dropped shadows, bold and color emphasis.
- Remember when using color, that 4 percent of men and 1 percent of women are color blind.
- Charts are an ideal way of conveying information and they should be used to emphasize a point.
- Line graphs show relationships over a long period of time.
- Bar charts show relationships over short periods of time.
- Pie charts show percentages.
- Organizational charts show structural relationships.
- Flow charts demonstrate the flow of data and processes.
- Gannt charts show time flows and interdependencies in projects.

Preparing the presentation:

  • Become familiar with the room and its layout.
  • Check seating and lighting and the data projector position for optimal viewing.
  • Before starting check the equipment and learn the controls.
  • Try and keep a spare data projector lamp (these are expensive though).
  • Focus the data projector and adjust to obtain clear images.
  • Go to a black screen when you are talking for a long period or using a white board.
  • Ensure that the audience have an uninterrupted view of the proceedings.

 Verbal presentation tips:

  • Speak clearly and use simple language, avoid complex sentences.
  • Involve your audience, challenge their preconceptions.
  • Ensure that the image matches the spoken text.
  • Use rhetorical techniques to maintain interest, change voice intonation and vary tone and volume.
  • Use pauses for effect.
  • Rehearse your presentation to get it right!

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These are some of the skills needed for successful negotiating...

  • effective speaking
  • effective listening
  • a sense of humor
  • a positive attitude
  • respect
  • self-confidence
  • emotional intelligence
  • persistence
  • patience
  • creativity
  • endurance

Without the above factors, negotiations will be difficult if not impossible. The necessity for negotiation arises because neither party will be able to get everything they want. Knowing that there must be concessions, each party in the negotiation is required to adopt an attitude of understanding that they must get the best deal possible in a way which is acceptable to the other party.

The importance of effective speaking and listening is clear; it is necessary to establish what you are looking for and what you are prepared to accept, while understanding what the other parties will be happy with.

A sense of humour and a positive attitude are essential because they allow for a sense of give and take. Negotiations can become fraught, and having the ability to see the other side’s point of view while being sanguine with regard to what you can achieve will be essential. Of course you will want as much as you can get – but the other side needs to achieve what they can, too.

Seriously uneven negotiations will simply lead to further problems along the line. An atmosphere of respect is essential. If you do not make concessions while demanding them from your counterpart, it makes for a negotiation which will end in dissatisfaction.

However important a sense of understanding for your "opponent" may be, it is also necessary to have the confidence to not settle for less than you feel is fair. Good negotiators understand the importance of balance. Yes, you will have to make concessions, but the point of making concessions is to secure what you can get – so you need to pay attention to your bottom line and ensure you are not beaten down to a minimum.

Knowing what is realistic, and ensuring that you can get the best deal, relies on being ready to insist upon something that the other side may not be willing to give initially. Emotional intelligence, persistence, patience and creativity can all play a part in this process!

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A plan gives you a track to run on, your route is well laid out and you can concentrate on your progress and you can map out your future goals and direction.

A plan sets priorities, this can be very important for small business with limited resources and modest budgets. A plan is can be viewed as your stepping stones to cross the river from the present to the future, the path to your vision of what your business will look like in 2, 3 or even 5-years ahead.

With plans for small business, we simply can not afford to do everything, some things have to be postponed, however some other projects are essential and even among these preferred projects not everything can be done at once. One of these essential projects is to develop a business plan! This will be a guide to know what to do first and what's coming next in the grand order of things!

That is why it is so important to have a plan, and to continually check you are on track and to monitor your financial and operational progress! See also Financial Ratios for a great FREE eBook to help you understand the financial management of your business!

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How many times have you been stuck when trying to come up with a budget or forecast for the next period (or next year). Well here is a quick budget template that you might find helpful in developing a quick snap-shot budget.

Below is an example profit and loss report for your business last year:

Budget Template Tool
So let's assume that is how your business finished up last year. Now you need an indication of what to expect from a profit and loss perspective for the next period/year. This is easy to do, all you need to know is what is your target sales or revenue number, once you have this you simply apply the same % to sales to each of the elements of the the new profit and loss.

See the example below on how to apply these percentages and make a quick budget:

Budget Template

 The result of applying these percentages can now be seen below in the snap-shot profit and loss.

Budget Template

So now you have a very quick way to achieve a snap-shot profit and loss for the upcoming business period using this budget template method.


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