24 | Bed & Breakfast News | Summer 2019
of the reasons for failure are deficiencies
in systems and processes rather than
employees”
The tip here is to review the seven
wastes (Transportation, Inventory,
Motion, Waiting, Overproduction,
Over-processing, and Defects – Google
‘MUDA’ for more on this) that exist in
all businesses and have a plan to reduce
these in conjunction with staff training
and engagement.
Fear of Price Increase
Another classic mistake is to put
off price increases for fear of losing
customers. You may lose some
customers but let’s do the maths. Let’s
say you have 20 customers and your
price is £1,300 per customer. (£26,000
revenue) If you put prices up by 10%, your
new revenue will £28,600. If you lose 10%
of your customers (2 customers x 1,300
= £2,600), your revenue will revert to
£26,000 but with two fewer customers
and less resources needed to service the
remaining 18 customers. Depending on
how you approach the price increase
and how you communicate it, you may
well find yourself pleasantly surprised
that less than 10% of your customers will
leave.
So panic sets in and you’re determined
to cut costs to make profits. Here’s
the thing though: Not all expenses will
have a greater impact on your profits.
A study by McKinsey and Co (global
consulting firm) revealed that whilst a 1%
reduction in fixed costs can have around
2% increase in profits, the same reduction
in variable costs has a bigger 7% increase
in profits. So instead of going for cost
cutting at all cost (no pun intended here)
conduct a cost benefit analysis and focus
on variable or direct costs first.
1% increases
Incidentally, the same studies also
revealed that increasing pricing has
a bigger influence over your profits
than reducing costs or increasing sales
volumes.
But here is what most entrepreneurs do
not consider doing: Assessing the power
of a mere 1% increase in price, 1% increase
in sales, 1% decrease in variable costs and
1% decrease in fixed costs.
Next time you sit down with your
accountant, ask him or her to run these
numbers and show you the impact it
will have on your profits. Would you
lose a lot of customers due to a mere 1%
increase in price?
Cutting the Wrong Expenses Not tracking numbers
You realise the cash at bank is not yours
and that you are not making profits. When it comes to profits, the biggest
mistake is not knowing the profit