Traditionally, business owners have worked on the conventional accounting measure of profit: Revenues – expenses = Profits. But relying on this approach gives you few options for increasing profits.
You can basically increase your revenues (easier said than done), decrease your expenses (many businesses have already cut expenses to the bone) or do a combination of both. But there’s another option.
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The ‘5 Ways’ formula was developed by ActionCOACH founder Brad Sugars, and is as follows:
(1) Leads x (2) Conversion rate = Customers
Customers x (3) Number of transactions x (4) Average rand sale = Revenue
Revenue x (5) margin = Profit
(1) Leads is the number of business prospects you’re in touch with over a period of time. A lead is anyone who has expressed interest in your product or service, but hasn’t yet purchased from you. The important thing to remember is that enquiries don’t necessarily mean customers – just because your phone is ringing doesn’t mean there’s money coming in. Many businesses spend too much time and money on this element. But we’ll get to that in a bit.
(2) Your conversion rate is the percentage of people that made a purchase out of your total number of prospects. For example, if you had ten people in your shop on a day and only two bought something, your conversion rate was 20%. Before you can get started on boosting your profit, you need to know what your conversion rate is.
(3) Your total number of transactions is how many times your average customer buys from you over a period (say a year).
(4) The average rand sale is exactly that – how much does your customer generally spend each time he or she buys from you? To start, you can just divide your total revenue by the number of transactions to estimate this figure.
(5) Finally, the easiest step to increasing your profit is to bump up your profit margin. This is basically the percentage of each sale that is profit. If you bought something for R70 (or it cost you R70 to make) and you sold it for R100, your profit margin is R30. Divide your profit by your revenue (eg. R30 / R100) to get your profit margin.
Now, let’s get back to that formula: Say you’ve done your research and figured out that you have 4 000 active leads coming into your business per year, and that your conversion rate is 25% (ie. you have 1 000 paying customers out of the 4 000 prospects).
They each buy from you twice a year and they spend around R1 000 each time they do. That gives you a yearly revenue of R2 million. If your average profit margin is 25%, your business is making R500 000 in profit per annum.
Laid out, it looks like this:
4 000 (leads) x 25% (conversion rate) = 1 000 (customers)
1 000 (customers) x 2 (number of transactions) x 1 000 (average rand sale) = 2 000 000 (revenue)
2 000 000 (revenue) x 25% (profit margin) = R500 000 (profit)
What would happen if you boosted each of the five elements by just 10%? Let’s see:
4 400 (leads) x 27,5% (conversion rate) = 1 210 (customers)
1 210 (customers) x 2,2 (number of transactions) x 1 110 (average rand sale)
= 2 954 820 (revenue)
2 954 820 (revenue) x 27,5% (profit margin) = R812 575,50 (profit)
By increasing each individual element by just 10%, you’d gain a whopping R312 575,50 extra profit – an increase of more than 60%.
The best place to start implementing ‘5 Ways’ is at the last step – profit. Generally, customers won’t quibble over a 10% increase in price, especially if your service is excellent and you deliver a great customer experience.
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Choose your best-selling product or service and start with that one. Then work your way backwards, finishing with lead generation – which is the hardest figure to improve, and yet where most businesses choose to start.
Once you start plugging your own business figures into the ‘5 Ways’ equation, you’ll quickly see its potential, and it should motivate you to start boosting each element by 10%, then 20%, and so on.
The Simple Way To Pay Wages When Your Staff Don’t Have Bank Accounts
If you have employed casual workers over the busy season, you can pay wages even if they do not have bank accounts.
At Absa Business Banking, the things that are important to you are just as important to us. We understand your business needs, which is why we have developed tailored solutions to help you where it counts. Take CashSend Plus, for example. It is a payment solution that enables you to pay workers even if they do not have bank accounts.
It is safe and secure
Your employee will receive a six-digit access code and a ten-digit reference number, so that they can verify the transaction. The money is instantly available at an Absa ATM.
You can even pay yourself
We have all lost bank cards or wallets at some point in our lives. What an inconvenience. Well, it is good to know then that you can access cash by sending it to yourself. Now, that is what we call better.
Please speak to one of our consultants or call 0860 111 123 or visit your nearest branch.
Absa Business Banking
Do better business. Prosper.
Entrepreneurial Balancing Acts with Debt
Young South African entrepreneurs face many challenges when it comes to debt-related financing. Small and medium enterprise (SME) owners typically require extensive debt financing from bank and non-bank lenders.
Young South African entrepreneurs face many challenges when it comes to debt-related financing. Small and medium enterprise (SME) owners typically require extensive debt financing from bank and non-bank lenders. Unfortunately, many South African entrepreneurs are limited in their ability to access capital markets. Among others, the major challenges facing entrepreneurs include lack of credit history, no collateral, shaky credentials, and unformulated business plans.
Regardless, SA entrepreneurs are forging ahead and using multiple resources at their disposal such as payday loan providers, non-bank lenders, family and friends, crowdfunding and other economic empowerment initiatives to raise the necessary seed capital for investment purposes. Given the staggering unemployment rate in the country (+25%), the only way out for many people appears to be entrepreneurship. The 2008 global financial crisis threw the economy for a loop, and now the hopes and dreams of many South Africans hang in the balance.
ISM Study Sheds Light on SA Entrepreneurial Pros and Cons
An intensive study conducted by the University of Cape Town’s Unilever Institute of Strategic Marketing (ISM) found that the country is experiencing ‘a crisis of aspiration’. Simply put, many South Africans are struggling to attain their career objectives in an economy that has been ravaged by corruption, mismanagement, and scandal. Despite tough economic times, South African entrepreneurs are determined to try their luck. Pressing challenges in the form of rising unemployment, and an economy mired in failure are challenging entrepreneurs to be more inventive than ever before. The most volatile component of the economic spectrum in South Africa is the middle class.
Many South African families have lived the high life, or ascended the rungs and then been knocked down a peg. This instability is creating added volatility in a country where high crime, mismanagement and political rancour pepper the scene. For many entrepreneurs, any access to credit is a godsend. Banks and non-bank providers offering personal loans, business loans, or credit card funds invariably expose themselves to debt default. For entrepreneurs, it’s important to know where to draw the line. Access to lines of credit in a crippled economy is significantly more valuable than the equivalent access in a developed economy.
How to Know when you are Overstretched as an Entrepreneur
Debt is considered a prerequisite for investment purposes. Most South Africans simply don’t have the necessary capital to start up a high-tech venture, fund a new business, or conduct marketing and advertising activity. As such, lines of credit are increasingly being used to propel business activity among SMEs – both in the formal and the informal sector. However, once debt reaches untenable levels, the tough questions need to be asked. For example, if multiple loans and multiple payments are required monthly, revenue streams need to be evaluated against expenses to gauge whether this is a feasible status quo.
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Many entrepreneurs find it difficult to manage multiple loans simultaneously, although it is necessary to acquire the capital from multiple sources. One of the ways to deal with these types of exigencies is a single loan from a low-cost lender in the form of debt consolidation loans. Simply put, these loans are provided by bank or non-bank lenders at lower interest rates than the prevailing interest rate on other lines of credit. By taking out a debt consolidation loan, the entrepreneur has more disposable income over time by not paying the higher interest on credit card debt.
Escape Debt Before Debt Consumes You
There are several other ways to know when your personal financial situation has reached critical mass. For starters, the nature of your business may require you to continue dipping into lines of credit to maintain business operations. If you don’t have the requisite discipline to stop indebting yourself, you may not be able to get out of debt. Debt consolidation is only effective insofar as you have the necessary discipline to put an end to debt financing of all business-related activity.
Credit should be used sparingly, and profits should be generated to allow your business to prosper. In a tight economic climate, costs are the bugbear that need to be attacked. Lavish trappings are unnecessary for business functionality – modest budgets, and high-quality goods and services are far more effective than window dressing at a premium.
How South Africa’s Small Businesses Plan To Invest Their Money In 2018
Here are their five areas they should focus their attention on in the next year and beyond.
Despite economic uncertainty, South Africa’s small businesses are positive about the future. In fact, our State of South African Small Business report reveals that 40% of small businesses are expecting to grow. However, to achieve growth without overextending their limited resources, small businesses need to invest wisely.
Here are their five areas they should focus their attention on in the next year and beyond.
When times are tight, companies typically reduce their marketing spend. This isn’t the case for 36% of South Africa’s small businesses. These respondents recognise marketing as a critical investment area.
They’d rather make a concerted effort to grow their customer base, than sit still and do nothing as consumer demand declines.
Without access to the latest technology, business growth can quickly stagnate. This is why 23% of South Africa’s small businesses plan to invest in up to date equipment, whether that be new machinery, mobile devices or computers.
The right investment in this area can give a business a real competitive advantage.
It can help boost profits and improve operational efficiency – both of which can help a small business withstand difficult economic conditions with greater success.
Consumers are spoiled for choice. Their needs are constantly changing and companies can’t afford to become complacent. To keep up with market demands, 22% of small businesses plan to invest in product development. Barring a few timeless classics, most products need a regular review and tweak to stay relevant and popular.
Digitisation is transforming business functions across the board. Technologies, like cloud software can take care of laborious administrative work.
This liberates employees from time-consuming tasks, enabling them to focus on more strategic work like customer retention and acquisition.
Technology has the power to improve productivity and efficiency. Which is why 18% of small businesses are going to focus their investment plans on this area of their businesses.
The customer should always be the priority. It doesn’t matter how good a product is, if there are no customers, then there’s no business. As competition increases, the user experience becomes more and more important to win over customers.
Business growth depends on happy customers and to achieve that, 18% of small businesses plan to invest in delivering better service.
All five of the above business areas are worthy investment focuses. The question is, how does a small business work out what to invest where? The only way it can invest effectively is with a full view of its company finances. A small business needs to be able to see which functions have provided the best return on investment to date.
It also needs to consider how much investment capital it has to spend. What’s more, before it makes an investment in say, marketing or product development, it must know exactly how and where the money needs to go.
The right software can help a small business access the real-time insights it needs to make better, faster financial decisions. To combat increased competition and market uncertainty, South Africa’s small business owners need access to up-to-the minute information from any device no matter where they are. An informed investment has the greatest chance of success.
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