As 2023 draws towards its final month, and for those businesses with December year-ends, there’s likely to be a stronger focus on financial performance. This will be against the backdrop of another challenging year on the economic front with:
- high inflation and increasing costs
- rising interest rates and
- a call on businesses to raise salaries to retain staff and help employees cope with the cost of living crisis.
How a business measures financial performance features in many of Shipleys LLP’s conversations with its clients. Success is often viewed as an increase in turnover, but a popular phrase among Shipleys’ colleagues is Turnover is Vanity; Profit is Sanity.
Why profitability is critical to the well-being of a business
This is because profitability is crucial for the ongoing well-being and long-term growth of a business. Profitability enables a business to:
- Cope with rising costs and tax changes
- Invest in the areas which will help its growth or improve its efficiency and effectiveness
- Attract finance for further investment
Many businesses with eye-watering turnovers have sadly closed because poor profitability undermined their cash resources and ability to trade.
In the latest figures from the ONS, in Quarter 2 2023 (Apr to Jun) UK private non-financial businesses (excluding banks) profitability was 9.6%. That was down from 10.7% in Quarter 1 (Jan to Mar 2023). Of this:
- UK manufacturing companies’ profitability fell to 7.8% from 8.6% in Q1.
- UK services companies’ profitability fell to 15.2% compared to Q1’s 16.1%
Profitability is vital for business resilience. As we look ahead to 2024, and whatever that brings in the economic and political arena, businesses with solid profitability will likely perform better.
What can businesses do to be more profitable in 2024?
Our Club members discussed steps businesses could take to be more profitable in the year ahead and focused on these key areas:
- Reducing non-staffing costs without adversely impacting performance
- Reduce staffing costs without adversely affecting performance
- Attracting and taking on new customers who prove profitable and not a drain on resources
- Generating more revenue from existing customers but with relatively lower costs
- Improving their financing arrangements
- Using their resources more efficiently
Reducing non-staffing costs and using resources more efficiently
Suggestions here included empowering everyone in the organisation to make savings on every element of the business operations. One example shared was an organisation which has gamified this. Across the business, there is a shared tally of the savings each staff member makes. It’s prompted a rethink of every cost the business pays and the value it gains in return. In many cases cheaper components have been sourced, and wastage has been reduced.
Another suggestion was to consider the cost savings to be made by reducing paper consumption. In recent years, technology has enabled many paper-intensive businesses to switch to electronic documents. This is bringing significant cost savings and proving more environmentally friendly.
Other ideas included:
- Using Artificial Intelligence as a way to release and save staff time. That time could then be more efficiently deployed elsewhere or used to complete tasks and projects more efficiently.
- Making the most of capital allowances and research and development tax relief to fund the equipment and other elements for business innovation and effectiveness.
Reducing staffing costs
To help boost profitability from staffing costs without affecting productivity, Club members discussed the merits of outsourcing. For many, it was viewed as a viable means for a business to bring in expertise and assistance without committing to ongoing salaries. Outsourced help can be scaled up or down to meet demand.
With the challenge of affording salary increases in tough trading conditions, some businesses are also offering one-off bonuses or thinking more creatively about their benefits packages to enhance their employee experience and strengthen staff retention. Offering additional holiday days and other well-being measures are just some benefits being explored.
Other ideas in this area included:
- Training, upskilling and better-managing employees for greater utilisation and a higher quality of work and productivity
- Looking at reducing recruitment costs – some businesses have brought recruitment in-house rather than using agencies
- Automating specific components of jobs through AI and other technologies – for example, dictation software or rethinking how admin in the business is handled.
Improving customer profitability
As businesses look to strengthen their profitability, it is essential to consider their customers’ impact on the enterprise.
New customer acquisition
With a current shortage of staff and resources in specific sectors, some businesses are now being more selective about which customers/clients they take on. In doing so, they have established selection criteria to evaluate new work opportunities against. If the opportunity doesn’t perform well against the criteria – the business politely declines to take the work on.
To ensure a new customer relationship does indeed prove profitable, it is important to:
- Be very clear about what the profit margin is on the job/work
- Invest time in good scoping discussions when looking to take on the work. This ensures clear expectations on both sides about what is involved, and the risk of projects falling out of scope is reduced.
- Develop a good onboarding approach with new clients. If both sides are clear of expectations, agreed timelines and deadlines, communication protocols etc it can help to protect the profitability of the work.
Some club members also suggested breaking a project into phases and setting a fee for each phase. This helps both parties check that the pricing and work are aligned, preventing any significant overruns at the end.
Existing customers
As well as ensuring that work for existing customers is proving profitable, if they buy additional products and services from the business it can often be at a lower cost of sale. Cross-selling and upselling also help a firm build greater loyalty with customers, who in turn rely on the supplier/adviser even more.
Club members from the professional services discussed the importance of investing time to understand their clients so they could identify further ways to help them. With colleagues offering a wide range of complementary expertise, ample opportunities exist to widen the support the firm delivers to a client. Making time to talk with clients, and having a good understanding of the different expertise in the firm, greatly helps here.
Improving financing arrangements
In this area, Club members recommended keeping a close eye on creditor and debtor days to spot any potential cashflow issues quickly.
Other suggestions included:
- Periodically reviewing banking arrangements and shopping around for better deals
- Running training for senior teams on more strategic aspects of the finances
- Ensuring management information is quickly assessable, of reliable quality and simple for decision-makers to understand
- Being more realistic and less ‘rose-tinted’ in forecasting and scenario planning – particularly when preparing business cases to raise external finance.
Summary
Profitability is an essential foundation to keep a business steady in tough times and help it grow. As our Club members discussed, the profitability of a business often comes from a collection of measures across its operations. Good results usually follow when the whole enterprise is empowered to manage costs carefully and preserve profitability.
Thank you to all the Club members who joined us at our November event and shared their ideas. If you would like to attend our future Business Club events, please get in touch with the Shipleys’ Godalming team for more information.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary.
Copyright © Shipleys LLP 2023
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