The 1% Advantage

How just 1% change in Sales and Costs can Transform Your Business

Running a business in Singapore is getting incredibly challenging with rising costs and the struggle to hire and retain talents. This is especially so for SMEs owners who are already fire-fighting every day and not having enough manpower and resources to execute the growth plan that you set out to achieve. In my early days in business, my focus was always on more sales. To me, I always thought that if I brought in more sales, my business will “do better”.

While that is true to a certain extent, when I discovered the importance of looking closely into what my financial statements were telling me, I was blown away. For SMEs that fall just shy of qualifying for traditional bank loans, finding ways to optimize financial performance is crucial – this could be a make or break for them. One effective strategy lies in understanding the impact of seemingly minor adjustments: a 1% increase in sales and a 1% decrease in expenses. I want to share more about my discovery of these small changes and how it can significantly enhance your net profit, driving you closer to qualifying for sustainable financing.

The Power of 1% Increase in Sales

Let's first consider the effect of a 1% increase in sales. For many businesses, particularly SMEs operating on tight margins, sales growth is a key driver of financial health. However, the benefits of even a 1% increase in sales can be substantial.

Example:

	Current	New	Percentage
Revenues	$500,000	$505,000	+ 1%
Less: COGS	$200,000	$200,000	-
= Gross Profit	$300,000	$305,000	+ 1.7%
Less: Operating Expenses	$200,000	$200,000	-
= Net Profit	$100,000	$105,000	+ 5%

From the above example, a 1% increase in Sales resulted in a 5% increase in Net Profit.

There are many ways you can explore increasing revenues:

• Can you increase the price by 1%? Of course, this requires consideration of your competitor’s pricing, what’s the perceived value of your goods and services, etc.
• Can you upsell your customers a product/service that complements with your current offering?
• Can you collaborate with other brands to clock more revenue?

The Power of 1% Decrease in COGS

Let's now look at the effect of a 1% decrease in Cost of Goods Sold (COGS). While it sounds unrealistic to expect a decrease in COGS because all we have ever experienced is the upward trend of costs, let’s put that discussion aside for now.

Example:

	Current	New	Percentage
Revenues	$500,000	$500,000	-
Less: COGS	$200,000	$198,000	- 1%
= Gross Profit	$300,000	$302,000	+ 0.67%
Less: Operating Expenses	$200,000	$200,000	-
= Net Profit	$100,000	$102,000	+ 2%

From the above example, a 1% decrease in COGS resulted in a 2% increase in Net Profit.

Most business owners think that cost of everything is going up so it’s not possible to ask for a price reduction. While that is true if all else is kept equal, there are many other ways to do this negotiation:

If you are in the products business:

• Can you change your packaging to make the cost of production lower?
• Can you ask the factory to produce more stocks at one go instead of multiple smaller orders?
• Can you leverage on your long working relationship to ask for a small discount?

If you are in the service business:

• Can some of your talent be sourced from another country with a lower salary?
• Can you automate some processes to lower the number of people required for the same job?
• Can you improve the productivity of your team so that the same number of people can serve more customers?

The Power of 1% Increase in Sales coupled with a 1% Decrease in COGS

	Current	New	Percentage
Revenues	$500,000	$505,000	+ 1%
Less: COGS	$200,000	$198,000	- 1%
= Gross Profit	$300,000	$307,000	+ 2.33%
Less: Operating Expenses	$200,000	$200,000	-
= Net Profit	$100,000	$107,000	+ 7%

When both strategies are employed simultaneously, the impact on net profit is exponential!

Where to begin

For SMEs aiming to implement these strategies, the first step is to do a detailed financial analysis. Understanding where revenues can be increased without proportional cost increases, and identifying specific expense items that can be reduced without harming operational efficiency, are crucial. Technology and automation offer significant opportunities for both increasing sales and reducing costs. For instance, digital marketing can target customers more effectively at a lower cost than traditional media. Similarly, automating inventory management can reduce both labor costs and errors.

Beyond immediate financial improvement, these strategies contribute to a stronger business model. Enhanced profitability makes SMEs more attractive to potential lenders and investors. It also provides a buffer against economic downturns and gives business owners more resources to invest in growth opportunities.

Conclusion

For SMEs in Singapore striving towards sustainability and growth, recognizing the profound impact of small changes is crucial. A 1% increase in sales and a 1% decrease in expenses might seem minimal, but when executed effectively, these changes can significantly enhance net profit. By continuously seeking ways to optimize both sales and expenses, SMEs can improve their financial health, making them more likely to qualify for traditional financing and achieve long-term success. Through meticulous strategy and consistent effort, the path to financial robustness and expansion is well within reach.