How do I improve my profit?

How do I improve my profit? 

May 16, 2023

When we look at our clients’ accounts, they often ask – how can I improve my profits or how can I increase my cash flow? We help our clients to do this, of course, but here’s some free advice about improving your profitability. 

Firstly, things that improve your profitability will likely improve your cash flow but there are other things that only improve cash flow. 

The are only 4 ways to increase your profits and cash flow. 

  1. Increase sales volume. 
  2. Increase sales price. 
  3. Improve your gross profit percentage. 
  4. Reduce your overheads. 

There are only 3 ways to improve your cash flow. 

  1. Reduce your debtors’ days. 
  2. Reduce your stock holding days. 
  3. Increase your creditor payment days. 

The 1% rules – how much of a difference would it make if you improved the above by just 1% in a year – what would be the impact on profits and cashflow? 

Let’s consider the following business. 

Turnover    5,000,000 
Cost of Sales    3,500,000 
Gross Profit    1,500,000 
Overheads    1,000,000 
Net Profit    500,000 
Trade Debtors    500,000 
Stock    1,000,000 
Trade Creditors    300,000 


 The improvement to profitability and cashflow in year would be 

Increased Sales Volume  1%  15,000 
Increased Sales Price  1%  50,000 
Increased Gross Profit  1%  50,000 
Reduced Overheads  1%  10,000 
Total    125,000 


The improvement to cashflow would be 

Reduced Trade Debtors  1%  5,000 
Reduced Stock  1%  10,000 
Increased Trade Creditors  1%  3,000 
Total    18,000 


So just by improving each of the 7 items by a very small percentage your profits would improve by £125,000, which is 25% and you would have additional cash in the bank of £143,000. 

Imagine what you could do if you increased each by 2% or concentrated on the items with the biggest impact. 

So now we know what to concentrate on in future post we will look in details how we can improve these 7 key items 

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