Profitability is the number one concern most CEOs have, and it’s not surprising. After all, around 65% of SMBs fail within the first 10 years.
Surfacing and prioritizing cost reduction and revenue growth improvement ideas is challenging for SMBs, but it’s essential for long-term success.
Luckily, there is an easy, effective tool to make the process far less challenging: profit trees.
This post will show you exactly how to use profitability trees to balance cost-cutting and revenue growth to maximize profit in your business and ensure long-term success.
What is a Profit Tree?
A profit tree is an evaluation tool used to understand how different revenue and cost factors impact your company’s profitability. Profit trees are particularly useful for SMBs at the beginning of their technology roadmap process to help align priorities and determine areas with the most potential for boosting revenue and cutting costs.
Although SMB profitability trees are usually used in business management consulting, they are also valuable tools for triggering important business discussions and getting team members to work toward shared goals.
Profit Tree Worksheet Structure
Picture a tree with a split trunk. That’s the start of your profit tree. On one side of the trunk you have revenue, and the other side is costs.
On the revenue side of the profit tree, you’ll find all the “branches” contributing to revenue growth, including the number of customers and revenue per customer. Each revenue branch has its own “twigs,” “leaves,” etc.
On the cost side, there are all your variable and fixed costs, such as software fees, office leases, staff salaries, etc.
Extending from each branch are your improvement strategies. Here, you can explore ways to improve each branch with key stakeholders and make notes of any updates that could reduce costs or boost revenue.
The Important Benefits of Profit Trees for SMBs
If you’ve never used profit trees before, they can seem like basic tools. But they come with important benefits for SMBs.
Firstly, a profit tree can help your team visualize cost and revenue drivers and more clearly show the impact on SMB profitability. Without this visual representation, it’s easy to miss where revenue or costs come from.
For example, if you notice an increase in revenue, is the total number of customers growing, or is it the average sales per customer? Perhaps it’s both?
On the other hand, if you see a drop in revenue, you may ask if the number of customers shrinking or if costs increased.
Calculating changes in the profit tree elements from year to year can be incredibly insightful, and it all starts with mapping out a visual representation.
SMB Profitability Branches of a Profit Tree
So, how do you figure out all the branches to add to your profit tree?
Cost Branches
Start by identifying the branches for cost elements, starting with three key branches:
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Operating expenses
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Production costs
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Overheads
It’s important to categorize your cost branches this way, as it gives you more opportunities to identify improvements.
You can then break down these branches further into subcategories specific to your business, such as:
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Labor costs
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Material costs
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Utilities
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Software fees
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Office rent
The branches on profit trees should be tailored to your business. Be as detailed as possible here to get a big-picture view of your overall costs.
Measuring and quantifying the impact of various cost elements on your company’s profitability is essential. Cutting costs is one of the easier and quicker solutions to impact profitability, so a full analysis here can produce surprising ROIs.
Revenue Branches
There are two key branches on the revenue side: the number of clients and revenue per client.
When it comes to improvement ideas to boost SMB profits, you might decide to focus on:
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Better marketing
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Improved product or service
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Increased distribution
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Upselling and cross-selling
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Increased pricing
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Improve customer loyalty
Once you have your entire profit tree mapped out, you can highlight key performance indicators (KPIs) that show if and when you hit milestones. By adding prioritization to your SMB profitability tree, you can focus on elements that drive the most change in your business’s bottom line.
How to Prioritize Cost Reduction with the Profit Tree Framework
Most companies make the mistake of focusing on revenue growth when working on their profitability trees, but there is real value in prioritizing cost reduction first.
Here are some simple yet effective strategies SMBs can use to cut costs within the profit tree framework:
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Automate administrative tasks to reduce salary costs.
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Update old or end-of-life software to reduce fees and licensing costs.
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Cut production costs by better monitoring operational efficiency with a centralized CRM platform.
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Embrace digital transformation to shorten lead times, improve client onboarding, and boost team collaboration.
Key Strategies for Driving Profit Growth
Combining cost management and revenue generation is a winning strategy for boosting SMB profits. Once costs are down and you’re happy with your outcomes, you’re in a great position for your revenue-boosting strategies to take your business to the next level. Here are some revenue-boosting ideas to get you started:
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Increase the value of your services and raise prices.
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Onboard clients quicker and cycle through the service process faster with updated client management software.
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Improve loyalty and customer retention with improved customer support.
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Modernize your marketing efforts to reduce your ad spend and increase ROI.
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Bundle services or upsell to existing clients.
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Improve client proposal win rate with improved client packages and proposal processes.
Get Expert Help Creating Your Profit Tree
If you’re an SMB looking for effective, actionable strategies to boost your bottom line, profit trees are essential. By visualizing costs and revenue, you’ll clearly see opportunities for growth and can prioritize projects into a strategic tech roadmap.
For more guidance on how to cut costs, consider a software stack that optimizes your resources, identifies efficiencies, and streamlines your business. Wondering where to get started? Connect with a StackPlan tech advisor today!
