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numbers that matter in your business.
Your gross profit margin, profit per
staff, profit per client or project, net
profit margin, breakeven number,
your monthly costs and your prices
are all important numbers to track and
focus on. If you currently speak to your
accountant once a year only to be told
how much tax to pay with no access to
your key numbers, then it is unlikely you
will be able to improve on your results.
The good news is that with so many
online accounting apps on the market,
(FreeAgent, QuickBooks and Xero),
entrepreneurs should no longer be flying
blind in their businesses.
Price Discounting
You’ve quoted a price and the customer
pushes back. Do you panic and rush to
offer a price discount? Let’s return to
the above example (on margins) where
you were making 30% margin on sales of
100. Let’s then assume you offer a 10%
discount. Your revenue drops to £90 but
you’ve kept your costs the same. Your
margins drop to 22% (£90 less £70 divided
by £90) The 10% discount now means a
26.6% drop in your margins (the original
30% less the current 22% dividend by the
original 30%. This is just the beginning
because it gets worse if we look at the
impact this will have on the bottom line
(net profit margin), assuming you keep
all your overheads the same. Were you
intending to have a 26.6% drop in your
margins by offering a 10% discount?
The point here is to be aware of the
profit effect of price discounts and use it
to negotiate a better win-win deal for all.
Competing on price
The mistake I see here is to look at your
competitors’ prices and under cut them
in order to win business. In the long run,
when you win more business you find
yourself not making profits because
your costs have gone up. It also become
difficult to raise your prices when you’ve
attracted price sensitive customers.
Conclusion
Profit is the oxygen of any business.
When you are in a competitive sector
with tight margins your business cannot
hold its breath for long without it.
Focus on avoiding these mistakes and
managing profitability and you’ll breath
more easily.
Jonathan Amponsah CTA FCCA is an
award winning chartered accountant and
tax adviser who advises entrepreneurs
on business and profit improvement.
Jonathan is the founder and CEO of The
Tax Guys.
www.thetaxguys.co.uk