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How to make a profit

Do you wish you made higher profits? It’s easy - just spend less. Adam Walker has some pointers to saving pennies, improving efficiency and thus creating profit!

Adam Walker

Adam Walker imageOne of my most successful clients displays a collection of large photographs outside the company’s boardroom door of the employees of the month. I should add here that they have well over six hundred staff and it is true to say that very few of them have won the award more than once – except one. This very regular winner’s name is Mr Parsimony and his photograph appears every month without fail. The clients refer to him as their most productive employee.

HEY BIG SPENDERS!

Profit imageEven after thirty years as a consultant, I am constantly amazed when I visit these various businesses by what some of them spend money on. I went to a business last month that last year made a profit of £96,000. Not bad, you may think. But this business has just spent an eye watering £112,000 on carrying out an office re-fit. Another has a staff bill that comes to no less than 58 per cent of their total turnover.

A third has just spent £35,000 on building a swish new website for a single office business. My point is – why spend so freely when it is so very hard to earn fees in today’s highly competitive market and when it is so much easier to avoid spending money than it is to earn some more.

POINTERS TO SAVE PENNIES

So, to be the savvy rather than scatty business owner or manager, what exactly should you be spending your money on? Just how can you be really sure that you are getting a proper return on your expenditure?

Well, here are some pointers. The biggest outlay for most businesses is staff salaries. Your total salary bill should not exceed one third of your turnover. If it does, you might be employing too many staff, overpaying them, employing too many senior people and not enough juniors or tolerating under-performance. You need to look at your salary bill very carefully to see if there is a problem and where, exactly, you are going wrong.

To be the savvy rather than scatty business owner or manager, what exactly should you be spending your money on?

The second biggest expense for most businesses is marketing. As the old saying goes, 50 per cent of most marketing budgets is wasted. The challenge is identifying which half it is.

In order to determine this, you ill need to measure the source of your instructions much more accurately. If you do this, you will usually find that, for example, your leaflet A, distributed in March,
produced £10,000-worth of instructions at a cost of £2,000, a return of three times expenditure, whereas leaflet B, distributed just a month later, produced £5,000-worth of instructions at a cost of £1,500, a return of 3.33 times spend. Leaflet A therefore, you may conclude, is the most effective.

The third biggest expense for most businesses will be premises. You need to question every aspect of your premises expenditure. Do you really need to be in the (highly priced) main high street? Do you really need a large double-fronted shop? Could some of your admin staff be housed in cheaper premises nearby? Will the cost of the office re-fit really be repaid from increased profits?

AND EVERYTHING ELSE

Finally, you need to review all your other items of expenditure: cars, copiers, IT, telephones, mobiles, iPads, cameras, software, sponsorship, stationery, fancy floor plans. The possible savings might only amount to a few thousand pounds per category but collectively this can add up to a great deal of money over the year.

The problem that I find with a lot of businesses is that the owner is not able to take an objective look at their own expenditure. It may therefore be well worth bringing in an external accountant or costs specialist to go through your costs line by line. The larger firms carry out this exercise on a regular basis. It is not an expensive thing to do – the typical cost for a small to medium sized single office business would be around £1,000. You will almost certainly recoup this cost within a few days through reduced expenditure.

As a final check, your profit margin after paying a proper commercial salary to everyone who works in business should be circa 25 to 30 per cent for a residential sales business, and circa 15 to 20 per cent for a residential lettings business. If your profit margin is less than this, you may do well to take a good hard look at your costs.

Adam Walker is a management consultant, business sales agent and trainer who has worked in the property sector for more than 25 years.

May 9, 2016