Maximising profits, value and life-style

Financial guru and ex-Dragons' Den investor Piers Linney offers his thoughts on leveraging your business.

Maximising profits

Financial guru and ex-Dragons’ Den investor Piers Linney offers his thoughts on leveraging your business.

The UK has approximately 5.7 million small and medium-sized businesses. Over 95% of these have no more than 10 employees, while 75% (around 4.3 million) have no employees at all. In other words, three-quarters of our small businesses are sole traders. When you own a small business, your challenge is to use the resources available to you as efficiently as possible to generate revenue and income, or profits. Small business owners constantly ask themselves how can I find time, make time or save time? How do I grow my business that best satisfies my lifestyle and ambitions?

If you operate in a world where your income depends on the number of hours worked, such as charging your clients or customers a daily or hourly rate, then your profits will always be limited (income = time multiplied by price). The time has arrived for you to leverage your skills and resources better, so you receive a higher financial return for your efforts: This means increasing profits while creating more spare time to enjoy the rest of your life.

Here are five points to consider:

Creating more time

If you have a particular expertise or trade ‘ maybe a gardener, freelancer, consultant or beautician ‘ you may need to re-structure your business to enable you to focus your attention on the part of the business which creates the most value. This is often delivery of your service, by you.

For example, a salesperson who regularly meets new clients, and successfully wins new business, needs to focus on the part of their work that secures the sale. Therefore, reduce the time spent on other activities, by making better use of technology and/or automation. You may need to outsource part of your business to achieve this. You will need to make a few calculations to discover if paying someone else to do something is cost effective.

You may be able to reduce time-consuming processes and avoid mundane tasks by embracing software. Once again do the maths. This could reduce administrative time spent working on your accounts, whether invoicing, chasing invoices, providing quotes or dealing with expenses.

Businesses of all sizes, involved with processes and systems, can always be improved, simplified, automated, and generally tweaked to become more efficient. So focus your time on what you are best at, and where you create the most value, which may mean using software or delegating or outsourcing.

Pricing and margin 

The other variable for those whose income depends on an hourly or daily rate, and time spent working, is the price you charge for your time, product or service. Simply by increasing your price, you make more money. Once you have maximised the time you have available, consider your pricing strategy.

Are you pricing correctly? How does it compare to your main rivals? In a rush to win new business, are you discounting too much and under-valuing your product or service?    

Many small business owners tend to under-price their product and service. You should test your pricing. Perhaps you can break down your pricing structure, so you can charge differing amounts for different levels of service. If you are happy with a given income, yet there’s an opportunity to increase your price, then doing so will create more spare time to do the other things you love. 

Your pricing strategy is important and worth analysing in detail, so it enables you to find the optimum or maximum figure. Even if you lose customers as your raise your prices, your overall income may increase.

Digital services and recurring revenue 

If you own a shop, provide a physical service or sell online, you start each new financial year with zero revenue. But with recurring revenue, or subscriptions, you add more certainty to the equation. And this was not lost on Jeff Bezos, the founder of Amazon which generates over $25 billion of annual revenue.

Many businesses have created recurring revenue models, such as those involved in car leasing. Fitness experts Peloton will sell you a bike but also tie you into one of their subscription services. If it is not possible for your business to create a recurring revenue stream, then what about developing a model to encourage re-occurring sales?  Take car dealerships, for example, which service satisfied customers who return on a regular basis, partly because their car is programmed to remind them to.

Discover more about your customers and perhaps use incentive schemes, such as a regular health check, or a small monthly fee for delivery of a newsletter. You can earn a good living charging 1,000 followers or subscribers £10 per month, and they can be based anywhere in the world. Recurring revenues and scalable digital services are favoured by investors and venture capitalists. This may require investment early on, but once the platform is up and running the marginal cost of adding a new customer becomes negligible.  

Software-as-a-service can create gross profit margins as high as 90% ‘ or greater ‘ and if the market is big enough, the potential for profit is enormous. Digital also opens up many routes to market, through advertising, partnerships, affiliate schemes and so on. 

You may be able to partner with another business ‘ although certainly not a rival ‘ whose customers have a similar profile to your target audience. But remember, the secret of success with recurring revenue businesses is through customer retention, not just acquisition. Otherwise, you simply end up re-filling a bucket that has a hole in it.

Even if your business model means 90% of your revenue is derived from one-off sales, you could still add 10% through recurring, or re-occurring, income. The arrival of digital technology is certainly a game-changer, so make as much use of this as you can. And it’s evolving all the time.

Operational leverage

This may sound like something from a management textbook, but operational leverage can apply to any business. Operational leverage is usually linked to fixed costs and ideally you want to avoid fixed costs in a small business. It’s much better for your cost base to move in line with revenue ‘ variable costs.

However, in some cases, many businesses have to invest in assets, such as machinery, property or a lease. As you increase revenue, these fixed costs become a smaller proportion of your overall cost base, which doesn’t grow in line with revenue. As you scale, it’s time to box clever, and especially with suppliers. With larger orders than normal, try to negotiate lower prices. Or seek improved payment terms that will have a positive impact on your cash flow.

Growth can also mean you do more with the resources you already have. You may face a step change in costs, if you need to hire new personnel, or move to larger premises, but by now you should have done your calculations to show that this new cost base will enable you to grow revenue and profits and leverage the new, higher, cost base. The key is to find a way to do more with what you already have, which increases productivity and profits.  

Sizing your business correctly

At the end of the day, it is important that your business allows you and your family to enjoy the life that you aspire to. Even a small change can make a huge difference to your profits, but not everyone wants to invest time and money into leveraging up their business, if it involves greater risk. 

At the most basic level, we all want to create more time to do what we enjoy and the ‘right size’ is very personal. In fact, your aspirations can change over time, depending on your personal circumstances and the business opportunity.

High growth and managing increasing numbers of staff members is not for everyone. But there are many ways that you can create more value and more personal wealth, without having to run a sprawling empire. 

Finally, the key to improving your life and increasing your profits is to develop a business where you are not restricted by the formula: Profits = Time x Price. By adding another factor to the formula, so that it becomes Income = Time x Price x Leverage, any leverage is going to increase your bottom line.

Piers Linney
Piers Linney

Share via
Copy link