The headline sounds like clickbait, right? Below ill show you how we did it and I guarantee you can do it too.
So what happens when you start a business is all your focus is on growth. Increasing sales usually take up most of your thinking space.
And this is correct, without sales you have no business. Sales are like food for your business body. Then as sales increase, you add extra overhead costs, this is natural. You add an extra staff member, you might hire an office, you get extra IT equipment, you travel more, you buy more stationery, you subscribe to trade magazines, you add software subscriptions, your paying electric, gas, telephone, you get the idea.
Then what happens is sales keep growing, you think great. You add more overhead, you increase inventory, bigger office, add a car, more software subscriptions etc.
You have taken your eye off your overhead costs. You think sales and future sales will keep covering your increasing overhead costs.
I did this with Coffee Hit. We grew 40-100% a year for the first 6 years. I never had a handle on the overhead costs in the business. Overhead costs are not cost of goods sold. Here we are looking at Overheads. These are costs YOU have added to run your business.
And they can be ignored and get out of hand when you are so focused on sales.
So how did we increase profit in under 24 hours?
In the book Great Game of Business, there is a concept called the Critical Number. The critical number is the one or two things in your business that need attention. If your not sure what your Critical Number is its the thing that keeps you awake at night.
The Critical Number is your focus for an entire financial year. In our first time of doing the Critical Number, we focused on Overheads. I knew we didn’t have a grip on overheads so we decided to focus on this. We targeted a 20% reduction in overhead cost. Now the great thing about reducing overhead is for every £, $ or € you cut in overhead goes straight to profit!! This realisation was amazing, every £ I saved went straight to profit. Let’s get to work!
I sat the staff down and explained our Critical Number target for the year and our bonus around this. I’ll talk more about our bonus program in another post.
Every staff member was given a line on the Overhead Profit and Loss statement to reduce cost in. It was an area that the staff worked in every day and made decisions in daily. So they were best positioned to achieve our targets.
So for example: I was given the task of reducing our bank fees. Our warehouse team was given the task of reducing packaging costs. Our office team was responsible for reducing office costs. We would focus on our target area for 3 months, I would report progress at our weekly meeting. Everyone was excited to see the results.
First, you need to know what you’re paying now. So I looked at individual lines on the overhead section of the P&L and also the total for 12 months. I averaged this out and we aimed to reduce this by 20%.
Then every 3 months we would focus on another area of overhead, whilst still working on costs in the first area.
For every overhead cost in the business, we would seek 2 other supplier quotes/prices. We would then go back to our existing supplier and give them the opportunity to offer their best price if it was higher than the lowest we received from the 2 new suppliers we would say to them we need it lower to at least match it. If they matched we stayed, if they didn’t we moved.
Another thing I did was I had added so many software subscriptions and such that I was paying for things I didn’t even know if we were using. So I called my bank and cancelled the card and asked to be re-issued a new card. I figured as soon as the payment declines the supplier will contact me and I can then decide if really need this service. If I wasn’t sure, I didn’t renew. It’s easy to add these software services back in later. That saved us a lot of overhead costs.
At the end of our financial year, I sat the staff down and presented our final overhead saving %. 56%! Unbelievable!
We doubled our profit without increasing sales by £1!! As it turned sales only grow 5% that year, but our profit doubled!
Using the above method we increased profit from Day 1. So within 24 hours, we had started to increase profit. Anyone can do this right now and I suggest you start too.
If you’re just starting your business, your ahead of the game already. Don’t add overhead. Wait a day or 2 to really think do I need to add this overhead cost. Treat every penny or cent in your business as gold, don’t let go of it easily.
Best of luck,