The Edge - Q1, 2014 - (Page 17)

Business Feature Three Routes to Increased Profitability by Bob Langdon REGARDLESS OF THE size of your pool and spa business, if you plan to increase profitability, you must implement one of three strategies: boost sales, increase gross margin, reduce expenses. Or, you can use a combination of the three. he most popular method is boosting sales, but without a cash flow plan, this could spell disaster for your business. Raising your prices to increase gross margin is one of the most effective and often overlooked options a business has to increase profitability, while the fastest way is to reduce expenses. T BOOST SALES When business owners are asked how they hope to increase profits in the coming year, the number one response is always to increase sales. Let's assume you are currently doing $3,000,000 in annual sales with a gross margin of 40 percent, or $1,200,000, as illustrated. Currently, your expenses are at 36.5 percent, or $1,095,000. Your current net profit, before taxes, is 3.5 percent, or $105,000. One reason you want to increase sales is because some expenses in your business are fixed, such as rent and equipment depreciation. If you have a sales increase of 15 percent, these expenses, hopefully, will not increase. Therefore, a sales increase of 15 percent would result in a healthy jump in profits. Quite often, for the sales increase to be achieved, variable expenses increase more rapidly in other areas, at least for the first year or two. Let's assume that your sales go up 15 percent in the coming year, but expenses continue to be 36.5 percent of sales, or $1,259,250, as illustrated. Your net profit has increased to $120,750, or a net-profit increase of $15,750. That's great, right? Yes and no. INCREASE NET SALES BY 15% CONDENSED P & L STATEMENT - FROM CURRENT OPERATIONS TABLE 2 TABLE 1 Let's say that you increase sales by 15 percent for the coming year, although it's the most difficult of the three ways to increase profits. The reason is that if your business is mature - generally five years or more in business - your customer base is fairly well-established and you need to take more dollars from existing customers, despite their established spending practices. Profit has increased, which is certainly the goal of every business owner. But to survive in the short term, you must have cash flow. If sales go up 15 percent, it is logical to assume that your accounts receivable balance will also increase 15 percent. Most business owners would be thrilled with only a 15 percent increase in their inventory investment. But both of these increased requirements for working capital put a cash strain on your business. Also, you might need more inventory to support this increased sales activity. To be successful, you must find a way to both increase sales and make certain that you have planned for the required cash flow needs to keep your business viable. THE EDGE 17

Table of Contents for the Digital Edition of The Edge - Q1, 2014

The President’s Message
Taking Your Business to the Next Level
Don’t Hire ‘Deadbeats’ – Use Talent-Based Interviews
Three Routes to Increased Profitability
The Latest and Greatest Online Marketing Tools
The Outdoor Room Boom
Successful Collaboration Between Landscape Architect and Pool Builder
Project Focus: Cipriano Custom Swimming Pools and Landscaping
Add Profits to the Job with Artificial Rock Waterfalls
Safely Operating the Service Truck
Selling Energy Savings
Service Award Winner Honored
Moving Beyond the Basics of Water Chemistry
Index of Advertisers

The Edge - Q1, 2014