Posted by Sarah Brown on 29 Jun '16
What is sustainable profit?
Minimising the risks as we prepare for Brexit
With the result of the referendum the UK and beyond has moved into a very uncertain situation where it is critical for any organisation whatever their structure be it business, social enterprise or charity to think about how sustainable their financial model is.
Nine key areas in securing your financial future
1 Avoid being too reliant on one person or customer
Good practice is that no more than 15% of the turnover/profit should be from a single customer or source. We recently worked with a building maintenance company which for 30 years relied on large on-going contracts from a council. Almost overnight they have gone and as they described it “it’s like we’re having to start from new”.
Similarly you should not be reliant on a single individual to maintain consistent success or if possible a single supplier or source of supply.
2 Have recurring income
Look for ways to generate on-going income from customers, and ways to convert one-off customers into retained customers even if they are only paying small amounts.
If possible, be in a sector where there is naturally recurring demand e.g. health, food, law, business support.
3 Keep overheads under control
Control fixed costs and overheads as much as possible.
4 Keep your customers
If you can keep your customers this will reduce your marketing costs and increase your profit. If you can also convert them into ‘raving fans’ then they will do your marketing and further reduce your cost of selling.
5 Balance cost of customer acquisition with lifetime value of the customer
Particularly as markets change and prices are driven down the cost of getting a customer in terms of sales and marketing must also reduce and certainly be tracked against the lifetime value of the customer to the company, this may require radical changes, for example, moving from a sales force to on-line selling
6 Look at collaboration
Collaboration can increase sustainable profits in various ways:
- Sharing resources can reduce costs
- Joint marketing by finding another business targeting the same market can improve effectiveness and reduce costs
- Developing a premium priced offering by linking with another service or product from a collaborator can expand turnover and margins and customer satisfaction
7 Have a niche
Generally being a specialist translates into higher margins and having a niche means you can charge more and your marketing is more cost effective
8 Work in a growing market
It is difficult to maintain sustainable profit in a declining market or one where the competition has become very strong and margins are being driven down
9 Keep costs down
Suppliers often have lots of ideas on how to reduce costs without sacrificing quality, but often no one asks them. Work with suppliers to review costs and check with your customers what they really value, you may be providing costly additions which they don’t really want
There is no right or wrong level of profit to make you sustainable. Profit levels vary radically by industry but what is essential is that you understand your financial figures and know where your profit is coming from, particularly now when things may change. Scarily we come across too many organisations of all types that do not know which of their products or customers make them a profit. Even more scarily many cannot explain their pricing strategy.
Whether you voted Leave or Remain we now need to make our organisations as secure as possible as the political negotiations begin. We can’t influence them but we can be prepared and knowledgeable so that we can seize opportunities and take action as required. For many of you considering the steps above will be enough preparation for what is to come. If you feel you might be particularly vulnerable to deregulation, changes in the free market or immigration, currency fluctuations, global competition or your own company culture then you can download a free Brexit strategy roadmap.
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