The five percent solution.
Recent studies analyzing the actual tax returns of over one million businesses have shown that almost all companies in this country create a pretax profit of five percent or less as a percent of sales. I am not only referring to small companies.
In case your company made a pretax profit last year of five percent or less, you can a minimum of double, and most likely a lot more than double, your pretax profits simply by reducing expenses by 5% while merely possessing sales level.
If you at present enjoy a profit ratio, a percentage of sales exceeding 5%, congratulations! Experts the minority. You are beyond the average and excelling exactly where others are not. But you can also. Much better. Unless your profit ratio is exceptionally excessive, the concepts I will teach you here should prove close to as effective for your firm as they are for those companies building a profit ratio of five percent or less.
The way to two times your profits is to lessen your costs by an amount comparable to your pretax profits being a % of sales when doing nothing more than holding income level!
If your profit rate, as a percentage of income, is less than 5%, you can use the idea to replace the 5% example of this I am using with your % and read as though I am discussing it with you directly. Of course, this may also work with 1%, 2%, 3%, or 4%.
Therefore, while I have called this the 5% solution, it could just as quickly have been referred to as the 1% solution or the 4% solution or whatever proportion equal to your pretax profit as a percentage involving sales from your last budgetary year. The concept is similar. Take your pretax profit rate and decrease costs with that percentage while holding your income level, and you will come close to doubling your revenue.
Let me demonstrate this by employing a larger company as an example. When you have $100 000 000 throughout sales and a 5% pretax profit, your costs are generally $95 000 000. Therefore 95% of the income through your sales goes to cover your costs. Your pretax earnings are $5, 000 000. If you can lower your costs by simply only 5%, you will raise your profit to $9 750 000.
You’re original $95 000 000 of charges times. 05 (a five per cent reduction) = $4, 750, 000. This is how much you could add to your bottom line. Your profits have risen 95% from $5 000 000 to $9 750 000 without a single dollar escalation in sales!
You have nearly increased your profits twofold. Let me place these numbers in viewpoint for you; with an average of 249 business days annually, excluding holidays, this company simply added $19 076 each day to the bottom line. This was achieved simply by lowering costs by 5%! How much per day could you add to your bottom line by duplicity your profits?
To realize precisely the same increase in profits at the current 95% cost ratio, this business would have to increase sales to nearly $200 000 000. Which would you think would be the easiest way to go? Could they increase sales from $265.21 000 000 to 200 bucks, 000, 000? If so, exactly how? At what cost?
Keep in mind we are talking about near duplicity of your sales to achieve the same bottom line result that can be achieved by merely holding a sales degree and reducing costs by 5%. Doubling this carrier’s sales would be an almost tricky task at any affordable time. However, cutting their costs by an amount that will permit them to double, or even multiple, their pretax profits is possible in a concise time and quite quickly.
The thought is the same no matter what your sales are. For example, should your sales be $5 000 000, and you have the same five percent pretax profit ratio, your pretax profits are $250 000, leaving your charges at $4 750 000. If you can lower your costs by 5%, they will drop by $237 500. This was arrived at by using 5% or. 05 within your costs, which were $4 750 000. Your new pretax earnings level is $487 700. You have nearly doubled your profits without increasing your income a penny.
To realize this same earnings increase by increasing income, you would have had to increase income by $4 750 000 or, in other words, get nearly double income. To determine how much of an income increase you would need to complement the added profits realized by simply cutting your costs, take the added profit understood by your cost-cutting endeavors and divide it by your local pretax profit ratio.
And that is all there is to it. You would need to nearly double your sales from $5 000 000 to $9 750 000 to realize a similar profit increase that you can attain by cutting your costs by 5%. Suppose. You can nearly double your profits by cutting costs to a sum equal to your pretax revenue ratio. Compare the effort to cut costs by a mere five percent to the cost and effort necessary to double your sales; you can be done very quickly, and others can’t. It is just that simple!
Whether your sales are $265.21 000 or $100 000, 000, 000, it works similarly to the way.
Double your sales or even reduce costs by 5%? Think about the effort and expense required to try and double your sales. Think of the risk. Think about the personnel costs. Think about the marketing costs. Think about the facility and functional changes that would be needed.
Even though you could double your product sales, how many years would it get? Just think about our sort of the 5 million dollar organization. Think about this. Which do you think is much more easily achieved, turning this business into a 10 million dollar organization or cutting costs by five percent?
Reducing your costs by five percent is not very difficult, can be done quickly, involves no growth, and improves your cash flow. You should be easily able to reduce costs by much more than this. Attempting to increase sales by a total will take a bit more doing. The option would appear to be very simple 1.
Of course, you can save 5% and a great deal more. There are countless ways, large and small, in which you can save 5% plus much more. Yes, I know that in some instances, you will be unable to reduce a price by 5%, and you will do well just by being able to control them.
But there are lots of places where you can quickly decrease actual dollar costs by 10%, 20%, or even half or more. Think overall and not simply individual costs. Think of areas where you can reduce costs by 1% or 2%; think about the areas where you can easily keep costs down by 25%, 50%, or even more.
Think about what I have shown you. Connect your pretax profit rates into these formulas and determine the impact cost control and expense reduction can have on the company.
This edition from the Welch Report has been offered by Derrick Welch, the author of ‘In Pursuit of Profits: Tips on how to at Least Double your Revenue Without Increasing Your Sales. Which include 1 000 Cost Commands, Expense Reduction, and Cash flow Producing Strategies You Can Start Applying Today To Dramatically Raise your Bottom Line.
And ‘Defy Mediocrity. Choose to be Uncommon. Think of typically the Alternative’.
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