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 to cut expenses to boost their profits. So what is this simple growth and profit-focused formula? It’s called the “5 Ways,” and it’s 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:
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%, for that day.
3. Average rand sale.
The average rand amount per sale, estimated over the course of a year. The average can range from R20 or R40 (say, for a discount retailer) up to hundreds of thousands of rands (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 R400, and profit was R100, the profit margin is 25%.
So how does this all relate to top line revenue and bottom line profit? Let’s see.
Check the numbers
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/Rand 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% = 1 000 Customers
- 1 000 X R400 X 2 = R800 000 Revenue
- R800 000 X 25% = R200 000 Profit
Examine the numbers closely and you’ll see the 10% 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% (including top line revenue), we were able to boost bottom line profit by 61% – or a total of R122 102.
What could you do with an extra R120 000 in your business this year?
Think 10% is impressive? Do some maths on your own and see what the numbers look like if you increase each factor by 30%, 50% or even 100% 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.
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