For most businesses, the easiest way to increase profitability is to reduce costs. This isn't as much fun as winning major contracts, or tripling sales, or opening new branches. But reducing direct costs can dramatically increase the profit on each sale, and eliminating unnecessary business overheads can have an immediate pleasing impact on your bottom line.

However, the best way to improve profitability is to increase turnover - provided the sales you make are profitable of course. It is the best way because there is technically no limit to sales, while there is a finite limit on reducing your costs.

Reducing costs

Identify the steps you can take to minimise your direct costs, such as by negotiating lower prices with your suppliers, reviewing processes and systems to minimise wastage, and implementing additional security to reduce the chance of theft.

It's worth remembering the example of one manufacturing business. The owner had been using the same supplier for 30 years, and never investigated buying their raw materials from anyone else. When the business was sold, the new owner put all of their main purchases out to tender, and saved 14% off their inventory costs, or close to $100,000!

Try to eliminate unnecessary costs to cut overheads and review costs such as insurance, power, telephones, and Internet. The best way to reduce overheads is often to improve systems such as by installing better accounting software, so you can generate regular reports to monitor costs and compare your actual costs to budget figures.

Reduce costs through good systems

Introducing systematic procedures and methods is one way to reduce costs. Good systems will help you minimise errors and reduce time and money wasted 'fighting fires' in your business.

The time invested in creating systems is usually minimal compared to that spent solving a problem from scratch, and has a lasting effect. Where appropriate, turn decisions into policies to avoid having to make the same decision again or sort out the same issues.

Learn from mistakes and problem areas. If systems go wrong, fix them. It is a good idea to review your systems periodically to see where improvements can be made. For example, finding information is a common time waster. Encourage your employees to organise both their printed and digital files and folders in a standard way so that information can be found easily by anyone. This will help to save time and frustration.

A software company placed all of their information centrally on their server, so that staff could access information all the time, from anywhere. The owner found each employee saved five hours a week, which was used more productively.

Focus

Simply focusing management awareness on profitability can have a dramatic impact. Even if cash flow is your top priority, this need not be at the expense of profitability.

Make sure all your employees are aware of the importance of profitability. The most commonly used key performance indicators are actual sales against forecasts, costs against budgets, gross margin and staff costs. Get help from your accountant to ensure you are monitoring the right indicators for your business because staff tend to work towards them whether they are good for the business or not.

Personnel

Encourage senior staff to delegate simple tasks to more junior staff who could do just as well. This will free up senior staff's time so they can focus on directing the business.

Monitor and measure employee performance and productivity and reward productive employees by linking pay to effectiveness. It's important to praise and thank staff when it is due, and provide a clear career path so they can grow and don't see their prospects as limited.

Continuous improvement

A simple planning cycle greatly enhances your ability to make continuous improvements. Good planning also helps you to anticipate problems and adapt as circumstances change.

Set measurable, time-limited targets and monitor how effectively your plans are implemented. Then review what you have achieved so you can learn from your experience and make continuous improvements. Keep improving the underlying systems and the planning process itself, but be ready to alter your strategy if necessary.

Be decisive, but think first. Once you have the information you need, putting off decisions wastes time and delays progress.

Apply lessons company-wide

Finally, set up systems that encourage the communication of best practice in your business. For instance, benchmarking different parts of the business against each other can be a useful way of sharing best practice.

Also improve communications with your customers and suppliers - they can offer useful tips and advice. Your customers will be aware of any problems and can tell you what you need to improve. Avoiding customers you know have complaints may simply make matters worse, and mean you lose the opportunity to improve your profitability.

Increasing your turnover

Some tactics to improve your turnover:

• Invest resources in increasing your sales volume: a retail business appointed a specific employee to be the 'sales champion' and they were given time off and a budget to come up with ideas. They managed to increase turnover by 9% by creating monthly business events and introducing an e-newsletter.
• Actively sell. Do not just take orders. Businesses that are content to simply take orders are less likely to survive, let alone grow.
• Retain existing customers through good service and explain to your staff why the lifetime value of customers makes this effort worthwhile.
• Review your credit limits if sales to a particular customer go up significantly and consider a credit check. If they are stable and a great customer, increase their limit, or find out what else you can do for them.
• Maximise the value of your sales: consider moving upmarket and providing a premium product and service. Add features to products if the perceived value to the user is greater than the cost to you.
• Keep your product or service up-to-date. If appropriate, extend your product range or work to ensure it stays ahead of the competition.
• Compare your price and quality with competing products or services. Aim to charge a full price and offer value for money from the extras you provide, such as after-sales service, installation and training or bundled extras.
• Focus your efforts on your most profitable customers. Look after the customers who place large or frequent orders, pay the full price, on time, and are low maintenance.

Review your profit margins

Businesses that offer a menu of products can use a simple technique to improve overall profitability. This involves reviewing sales and profit margins periodically, and dividing products into four categories.

1. High percentage of sales and high profit margins. Nurture these stars.
2. High percentage of sales but low profit margins. Consider a price increase and examine how you can cut costs to increase your profit margins.
3. Low percentage of sales but high profit margins. Consider a sales push.
4. Low percentage of sales and low profit margins. Eliminate these where possible.

Take into account any possible effects before making decisions. For example, a low-profit product might be the one which brings other business from a major, highly profitable customer.

Next steps

• Meet with staff to identify the best ways to increase the profitability of your business.
• Access these tools from the  Department of Labour on increasing workplace productivity or look for any relevant training or workshops in your region.
• Get help from your accountant or financial adviser to identify the key performance indicators you need to measure. Concentrate on the top three or four indicators first.
• Develop or improve the systems in your business. Keep them clear and simple and communicate them throughout the business.