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How much was your largest deal last year? £1,000? £10,000? £100,000? Wherever you are on the scale, the chances are that if someone guaranteed that all your future deals would be an order of magnitude higher, you would leap at the chance.

But if a £1,000 deal costs you £500 to complete and a £10,000 deal costs £9,500, they are both worth the same to your business. The larger project will probably bring more headaches and entail more significant risk and a more excellent investment in time and resources – an opportunity cost that means you can’t take on other work – so it may be worth less to your business. 

Many business owners tend to chase more prominent and bigger project deals, mistakenly believing this is needed to bring success. In fact, we should be looking at our profit margin, not simply the size of our sales and projects. This is the underlying truth behind the slogan, “Turnover is vanity, profit is sanity, cash is reality”.

This doesn’t mean that we shouldn’t aim for more extensive projects; it just means we should always be aware of the costs involved in our work and try to keep those costs as low as possible to improve our margins.

There are several strategies that you can put into place to improve margins:

1. Eliminate productivity inefficiencies by making sure all tasks have manuals and documented processes. When you’ve got an experienced workforce, relying on your personnel “just knowing” how things work is tempting, so you never get around to documenting processes. But if there’s a change in staffing or equipment, there’s no standard to fall back on, and discrepancies arise. Documentation can also reveal inconsistencies and bottlenecks, leading to greater efficiency. 
2. Reduce wastage. Again, once a production process is set up and running, it’s tempting to assume that everything is as it should be. Often, though, by monitoring production processes, areas where wastage occurs, can be identified, meaning that this can be reduced. Alternatively, if certain wastage is inevitable, can you partner with a business that uses the waste from your processes? (This has the added advantage of being a genuinely green approach.) Another area where wastage often occurs is in providing samples; while this may be appropriate, it’s essential to recognise that these have a cost. 
3. Capture and bill time better. Especially in the initial stages of a deal, we are often expected to attend meetings and provide estimates that require a fair amount of work, sometimes to the extent that we provide free consultancy with no guarantee of payment. If it will take you a week to scope a project before the client has decided to work with you, can you charge for the scoping exercise on the understanding that this cost will be deducted from the final charge if the project goes ahead?
4. Talk to your suppliers. There may be opportunities to reduce unit costs by buying in bulk. Or perhaps you can get a discount for prompt payment. But while this may look tempting, remember to check whether it will benefit you: don’t buy materials or stock that will remain unused for an extended period, and don’t empty your bank account to get a discount and have your money tied up in the unused stock.
5. Expand into a new marketplace. Working with clients in a new sector or a different geographical region may allow you to take advantage of economies of scale, while expanding into a new product line or service offering may enable you to take up the slack in the production process.

Looking at your profit margins and working out how to improve them is good for business. There’s more to it than that: the recent pandemic and economic crisis took us all by surprise, but some businesses coped better than others; we all learnt lessons about resilience, and the word “pivot” was on everyone’s lips. Many strategies that improve profit margins will also make your business more robust and capable of surviving unexpected changes.

If you’re interested in taking firm control of your numbers and future-proofing your business, let’s chat (call Julia on 07855275099) – we’ve got other ideas that might interest you, too!