Profit Boosting Tip – Understand your costs as percentage of revenue
May 15, 2012 | 
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One of the hardest things about business today is keeping flexible enough to deal with upturns and downturns in your sales. Often businesses are stuck with costs that they can’t change if things take a dip or are barely keeping their head above water when things are on the up.
To overcome this, start thinking about all your costs in terms of percentage of sales. Start with where you are now – what percentage of your sales revenue is spent on costs. Break this down into key categories that work for you. For example start in terms of critical costs (things you cannot get out of and have no control over) and discretionary costs. Within each of those you need to identify the major chunks of costs – staff, premises, IT, materials, production, sales and marketing and so on.
Once you have the breakdown, consider if you think the spilt of costs is right. For example, do you want to spend twice as much on sales as staff to deliver it or not. There is no real right or wrong answer and every business is different, but some of the breakdowns may surprise you. If you are spending very little on your sales effort compared to your technology for example, maybe you are doing things the wrong way round. I know businesses who have invested heavily on infrastructure such as invoicing systems and so on, before they actually spent anything driving sales.
Next, think about what you would do if your sales volumes changed significantly. Run some scenarios to look at what would happen if your revenues went up or down by 30%. Could you scale up the costs quickly if you needed to allow you to cope with the extra sales revenue? More importantly, could you scale down the costs as quickly if you needed to?
Try and get as large a part of your cost base into the discretionary pot and think of ways you can make the costs variable, rather than sitting on costly overheads that you can’t change if your business changes. For example, can you lease rather than buy buildings? Can you outsource activity so that if the demand changes you can react more quickly?
Finally if your business is large enough, set your teams the challenge of managing within these percentages. Get everyone to understand the part that they play in turning your sales into profits. Set an expectation about what you expect in terms of quality and performance, then incentivise and reward the teams for delivering that at a lower percentage of sales revenue. Equally, be ruthless about those areas that go past the percentage you have set, unless they can truly measure the impact of extra spend on your sales and profits. Remember, if your costs go up and you cannot pass it on to your customer, you are simply losing profit.
So, take action NOW – this week work out your percentages of sales and how you want to move them AND click below for more profit boosting tips.
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