Cutting costs to increase profits – seeing the benefits of frugal business

The current economic climate is tough, make no mistake. There are many businesses folding in many different industries. The fight is on to keep afloat, and for many the target is to find new customers to cover the overheads of the business.

In these circumstances, it’s wise to take a step back and think; really think about if this is the most sensible option. On several occasions business owners have approached me asking for advice on how to find more customers to increase their profits… of course, more customers is always a good thing as long as you are able to make a profit but there is another, often easier option, that can be done with very little effort.

Consider a small trader (e.g. 2 man plumbing company) is turning over £120, 000 per year.  This results in a gross profit of around £70,000 with net profit for the owner of around £40,000 after all costs and wages have been paid.  This means that net profit is approximately 30%.

The costs have been pretty fixed over the last 3 years and include:

Fuel (£150 per week) = £7800

Insurance = £2200 p year

Phone (£200 per month for 2 phones) = £2400

Wages (£1200 per month) = £14400

Parts and spares = £23,200

Total business costs per year = £26,800

By re-negotiating phone and insurance it’s possible that a saving can be made of at least 30% or about £1380 per year.   Driving sensibly could save another £700 per year, or about 10%.  Wholesale suppliers of spares will often offer a discount of 5-10% if you can demonstrate that you will take your business elsewhere so that could equate to another 10% saving or £2320.00 per year.

Total savings for the year based on the above would be – £4400; or looking at it a different way an increase of profit by 10%.

To achieve the same increase in profit without looking at cost savings, it would have required an increase of £12,000 worth of turnover and taken considerably more effort and time to achieve.  By spending a little time negotiating with suppliers over prices can make a massive difference to a company’s profit levels and in these current times can make the difference between a company surviving and failing.

 

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