Two ways to grow your business: volume and profit margin
This month, we’re focusing on techniques for growing your business.
You may feel that your business is already as big as you want it, and that’s perfectly OK. At FreeAgent we don’t believe that every business owner has to aspire to be the next Richard Branson*.
But even if you think you don’t want to grow at the moment, stick with us for now -- there may come a time when you lose a major customer and need some insight on finding more customers, or may need to revisit your profit margin if a key supplier raises their prices.
So the first crucial question to ask is, how does a small business grow? As a starting point, there are two key ways: you can grow your volume or your profit margin, or both.
Growing by increasing your volume
“Increasing your volume’ is business-speak for simply making more sales - you can sell more of the same goods or services that you are already selling, either to your existing customers, or to new customers.
Here are a few things to consider when you’re thinking about how to increase sales volume:
- Expand to a new market segment - for example, if you’re already selling to one business type, find similar business types that you could target
- Expand to a new geographic location - especially if you’re selling online, what other countries might be interested in your product?
- Expanding your product and service range - would offering a new product or service allow you to tap into a much bigger market than the one that you’re currently selling to?
Growing by increasing profit margin
Your business’s profit margin is how much profit it makes for every pound / dollar / euro / etc of sales.
To work out your business’s profit margin, or margin, add up the day-to-day running costs of your business over a set period of time - usually a year, but sometimes a month or a quarter. Then take the amount of money you earned over that same period, and subtract the running costs from that number. This number is your “net profit”. If you have a set of accounts, you can also pull these numbers from your profit and loss account, or P&L for short.
Take that net profit figure, and divide it by the total amount of money you earned in that period. This is your business’s net profit margin.
You can then start breaking your profit margin down into areas of your business, to identify the most profitable and least profitable parts - try looking at:
- Profit margin by customer type
- Profit margin by product or service
- Profit margin by country
- Profit margin by project
Once you have a clear view of profitability in each part your business, you can make decisions about where to focus your time and whether you should take steps to increase your profit margin. For example, you could put your prices up on a particular product, because so long as your costs either stay the same or don’t go up as much as your sales do, your margin will improve if you increase your prices. We’ll be looking at some pricing tips later this month.
Over the month of July, we’ll be looking into detail about how you can maximise your profit margin, volume, and pricing to grow your business. See you next week!
* If you’re a woman, the beard might be a bit of a problem here.
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