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5 Ways to Grow Your Profits

A simple formula to help you maximize profit margins
August 14, 2009
URL: http://www.entrepreneur.com/article/203046

For years I've taught a simple, "secret" formula to massively grow profits in any business.

Interestingly, those starting businesses seem to embrace this formula far more easily than owners who have been in business for a long time.

I'm sure there are a number of reasons for this. But the ignorance and stubbornness of other business owners can prove to be very profitable for you--especially as many of those "experienced" business owners continue to focus solely on revenues and expenses, which in turn drive profits.

When you are comfortable with the numbers and can readily work with all the factors in the formula, you'll start seeing more bottom-line growth than your competitors.

How?

You'll have more factors to work with than "expert" owners who love cut expenses to boost their profits.

So what is this simple growth and profit-focused formula? The "5 Ways," and it is a strategy that pinpoints the five key factors that exist in every business--factors that can be multiplied to deliver stellar bottom-line profits.

These are the five simple factors:

  1. Leads: The total number of people who have contacted or who have been contacted by the business--over the course of a year.
  2. Conversion rate: The percentage of people who actually make a purchase. For example, if 10 people walk through a store and three people buy something, that store's conversion rate is three out of 10, or 30 percent, for that day.
  3. Average dollar sale: The average dollar amount per sale, estimated over the course of a year. The average can range from $5 or $10 (say, for a discount retailer) up to tens of thousands of dollars (for a business such as a car dealership).
  4. Average number of transactions: The number of purchases the average customer will make over the course of a year. Again, it can be an estimate. This number will probably be larger in a retail setting than in companies that operate in a professional services industry.
  5. Profit margin: The profit percentage of each and every sale. Simply put, if a business sells something for $100, and profit was $25, the profit margin is 25 percent. 

So how does this all relate to top-line revenue and bottom-line profit? Let's see.

Your Company

In your sample company, we use a very simple formula to multiply the factors we've just discussed. Remember, this formula multiplies factors instead of just adding them, so the cumulative impact is massive.

The "5 Ways" formula looks like this:
Leads x Conversion Rate = Customers
Customers x Avg. Value/Dollar Sale x Number of Transactions = Revenue
Revenue x Profit Margins = Profit

In your company, let's say you have either estimated or fully determined the following numbers:
4,000 x 25% = 1000 Customers
1000 x $100 x 2 = $200,000 Revenue
$200,000 x 25% = $50,000 Profit

What does all of this mean?
Simply put, you are running a business that converts one out of four prospects into paying customers. Those customers average two purchases at $100 per purchase each year and your company enjoys a 25 percent profit margin on revenues of $200,000.

It also means your total profit for the year is $50,000.

So what would happen if, over the course of the next year, you increased these results by just 10 percent in each of the five areas?

Let's do it, and then let's take a look at what happens to your bottom line:
4,400 x 27.5% = 1210 Customers
1210 x $110 x 2.2 = $292,820 Revenue
$292,820 x 27.5% = $80,525.50 Profit

Examine the numbers closely and you'll see the 10 percent increase is incremental, which means you could easily nudge numbers up by that amount over a period of months--or even weeks.

The bottom line is that the new bottom line looks very interesting, doesn't it?

Even though we've increased each factor by just 10 percent (including top-line revenue), we were able to boost bottom-line profit by 61 percent--or a total of $30,525.50.

What could you do with an extra $30,000 in your business this year?

Think 10 percent is impressive? Do some math on your own and see what the numbers look like if you increase each factor by 30 percent, 50 percent or even 100 percent down the line.

The key is that we are multiplying factors--not adding--which has a massive impact on profit. The "5 Ways" isn't a complicated numbers game. It's simply looking at your business in a different way and working with a set of numbers that exist in every company.

While your competitors will be in an endless cycle, trying to increase top-line revenue and cutting expenses to generate more profit, you'll have at least five other factors with which to work. And there are literally hundreds of strategies you can use to boost those numbers immediately and over time.

We'll look at some of those strategies in the future.

For now, work with your numbers and brainstorm ways to increase leads, get more customers coming back, increase the amount they buy, and raise your profit margins--and you'll be miles ahead of the majority of owners successfully operating businesses today.Better yet, you'll be pleasantly surprised at how easy all of this is to do--and you'll be more than happy with your ultimate results.