Many businesses continue to judge success by one simple measure: turnover.
It's easy to understand why. Growing sales often feels like a sign that a business is moving in the right direction. However, many business owners are now discovering that healthy turnover doesn't always translate into healthy profits.
Across almost every sector, operating costs have increased significantly. Employment costs have risen, supplier prices remain under pressure and inflation continues to affect day to day expenditure. As a result, businesses that appeared to be performing well a few years ago may now find themselves working harder whilst retaining less of what they earn. This makes profitability one of the most important conversations a business can have.
At Wake Smith, we are working with many businesses that are asking similar questions. How do we absorb rising costs? Should we review our pricing? Are we making the best use of our people? Are there areas of the business that are no longer delivering the return they once did?
There is rarely a single answer.
Instead, the businesses that tend to perform most consistently are those that regularly review the fundamentals rather than waiting until financial pressure forces difficult decisions.
That starts with understanding the true cost of employment. Salaries are only part of the picture. Employer National Insurance contributions, pension costs, training, recruitment, holiday pay and wider overheads all contribute to the overall investment a business makes in its people. Reviewing how time is spent, where processes can be improved and whether technology can remove repetitive administration often delivers greater long-term value than simply reducing headcount.
It's equally important to understand where profit is really being generated.
Not every customer contributes equally to the business. Some clients require significant time and resource whilst generating relatively modest returns. Equally, products or services that were profitable several years ago may no longer deliver the margins they once did.
Regular profitability reviews allow businesses to make informed decisions about pricing, resource allocation and future investment, rather than relying on assumptions that may no longer be accurate.
Cashflow also deserves ongoing attention.
Even profitable businesses can experience financial pressure if cash isn't available when it's needed. As operating costs increase, so too does the amount of working capital required to support day to day trading. Maintaining accurate forecasts and reviewing debtor performance can often provide early warning signs before problems begin to emerge.
Tax planning should also form part of wider commercial planning rather than becoming a once-a-year exercise. Reviewing available reliefs, planned investment and business structure throughout the year can help businesses retain more of their profits whilst supporting future growth.
Alongside these financial considerations, businesses should also be preparing for the continued rollout of Making Tax Digital. Whilst compliance is often the headline, businesses that embrace digital systems frequently benefit from improved reporting, greater visibility and better quality management information.
Commercial agreements are another area that are often overlooked. Customer contracts, supplier agreements, employment contracts and shareholder arrangements may have been drafted in a very different economic environment. Taking time to review whether they remain appropriate can help reduce risk and improve commercial flexibility.
These are just some of the themes explored in our new Protecting Profit guide.
Designed specifically for owner managed businesses, the guide provides practical insight into the areas that business owners should be reviewing to strengthen profitability and support long term success.
You can download your free copy here:
If you'd like to discuss any of the topics covered, please contact our Company & Commercial team online here or call us on 0114 266 6660