Improve your business with multiple small increments

Need advice? We can help.Get in touch today

Making big changes to your business can sometimes seem daunting, and can have unplanned consequences – for example, if you increase prices by 10% but lose 10% or more of your customers, you’ll be worse off (but you’re no worse off if you only lose 9% of your customers).

Those are drastic steps for a small business owner, but making just very small changes right across your business can have a massive compound effect, as this very simplified scenario shows:

Say a business has 100 customers. Each customer buys one product from the business for £250, once a year. The gross profit margin is 30%, and overheads are £5,000 per annum.

The profit and loss account will look like this:

Sales (100 x 1 x £250 x 1)
£25,000
Gross profit 30%£7,500
Overheads£5,000
Net profit£2,500

The business owner wants to grow the business and comes to us for advice on the best way to achieve that. We start by looking at the customer base, and suggest that they try to grow it by, say, 10% per annum, but the owner counters that they are a long-established business and he doesn’t think there are that many potential new customers out there.

So we move on to prices. If you can’t get more customers, how about increasing your prices by say 10%? “O no, if we increase prices we’ll lose customers!” And so on. Any significant improvement looks too difficult or impractical.

So we try a different tack. “Do you think you could improve on each element of the business by an average of just 1%?” “Yes, that sounds easy enough. But would 1% make much difference?”

Let’s see how that changes the figures:


Sales (101 x 1.01 x £252.50 x 1.01)

£26,015
Gross profit 30.3%£7,882
Overheads£4,950
Net profit £2,932
Net profit increase of over 17%

As this demonstrates, even small changes can add up to a big improvement in profit. That’s the magic of compounding.

If you’d like to talk to us about how we can help you improve your business profits, get in touch now.

Useful information for Improve your business with multiple small increments

Limited Companies

Should a key member of your staff be suddenly unable to work, it might be best to consider how you can reduce the impact of their absence.

Read more
Limited CompaniesSole Traders & Partnerships

Here are the tax implications relevant to providing a gift/event to best please your employees, whilst also being financially sensible.

Read more
Sole Traders & Partnerships

Sole traders & partnerships: If your year-end is not 31 March or 5 April, HMRC is changing how it will assess your profits.

Read more
Limited CompaniesSole Traders & Partnerships

If you’re considering using a piece of cloud-based accounting software, such as Xero, QuickBooks, or Sage, then it’s important you understand what each option can offer you. What follows are some worthwhile considerations…

Read more
wave

I am a...