Increasing profits is always a priority for businesses, but it may feel like the coronavirus pandemic is causing business growth to falter. Although the economy has recovered fractionally in recent weeks, it’s still all a little up in the air. Whether you’re B2B or B2C, selling more simply may not be possible right now.
Of course, increasing sales isn’t the only way to increase profits. This article will explore how tightening up your overheads with an investment in solar PV can increase the profitability of your business. Make your finances work smarter, not harder: just because your top line can’t grow doesn’t mean your bottom line can’t.
Solar PV: a small tweak to tighten the purse strings
Since we’ll be using these financial terms a lot, let’s start with a quick recap. Top line refers to a company’s revenue, or how efficient it is at selling. Its bottom line, on the other hand, represents how efficiently a business manages its operating costs. As explained by Investopedia, the top line “does not take into consideration operating efficiencies which could have a dramatic impact on the bottom line.”
Ideally, a business’s top and bottom line grow in tandem to generate a profit. But, if you can’t grow the top line, improving one’s bottom line is another way to increase profit. Introducing on-site renewable energy generation, such as on-site solar PV, is a small tweak that can improve a business’s bottom line, and therefore its profitability. Increasing one’s top line typically takes a lot more effort.
For example, say your business has a profit margin of 20%. This means that you need to sell £5 worth of products or services to generate a £1 profit. However, gaining a £1 efficiency on one’s bottom line immediately equates to £1 in profit.
Simply put, it’s easier to increase one’s bottom line than the top line. However, in our experience, many businesses neglect or forget this, especially among smaller companies. We’ve seen many businesses leaders run themselves ragged trying to increase their revenue. This approach simply isn’t sustainable, and not necessarily effective. An increase in sales may not always equate to an increase in profitability since selling more usually comes with the associated costs of manufacturing or delivering more services.
Energy efficiency and the bottom line
As we mentioned above, the top line does not consider inefficiencies that could be hindering business growth. For many businesses, this could be something as seemingly simple as energy inefficiency.
According to BEIS’s SME Guide to Energy Efficiency, “almost a third of small firms highlight the cost of energy as a barrier to the growth and success of their business.” The guide goes on to state that “the average SME could reduce its energy bill by 18-25% by installing energy efficiency measures”.
Improving energy efficiency for a business isn’t just about improving energy consumption (although this is a good place to start). As a strategy for bottom line improvement, it goes beyond switching to LED lightbulbs and upgrading inefficient machinery., Solar PV provides a long-term financial saving by cutting a business’s spend on grid energy. Whilst the cost of grid energy is volatile and always rising, solar PV helps protect your business from erratic market fluctuations, providing the stability needed for sustainable growth
Ultimately solar is a very safe investment. No matter what’s going on in the world, the sun will always continue to shine.
Profitability and Power Purchase Agreements
Although purchasing and installing your own solar system will deliver a fantastic return on investment, this isn’t a possibility for every business. Any long-term financial savings are preceded by an immediate outlay, particularly in an uncertain economic climate.
However, businesses without immediately available capital can still benefit from solar through a Power Purchase Agreement. Under a PPA, the solar installer rents the customer’s roof space and uses it for solar. The client keeps their existing grid supply arrangement but purchases the solar energy through the installer. The efficiencies of onsite generation mean that solar energy can be sold cheaper Th than the going market rate, and therefore the client saves money, improving their bottom line without any upfront investment. At the end of the lease, ownership of the panels transfers to the customer and they receive 100% of the benefit at no additional cost.
While purchasing solar provides customers with a larger annual saving, PPAs have their own unique benefits. Installing solar on your own premises can cause an increase in business rates, but under a PPA much of this increase can be mitigated, and it is the installer that is liable to pay it, the building owner is exempt. Additionally, under a PPA contract servicing and maintenance is included, so there are no unexpected bills, you simply pay less for the energy you use. Regular cleaning and servicing help ensure an array is performing at its peak, increasing its efficiency. Finally, as there is no initial investment you are not impacting your balance sheet, leaving your borrowing capacity available for core operational spend.
The bottom line
While this article unashamedly focuses on the financial benefits of solar, for many businesses this isn’t the driving motivation.
Regardless of whether a company chooses Capex or PPA solar, the overwhelming benefit is the ability to green your business. If the UK is to meet its demanding carbon reduction targets in line with the Paris Agreement, every company must do its bit.
Solar panels are a clear indicator of your business’s commitment to reducing its environmental footprint. With stakeholders such as customers and partners also becoming increasingly environmentally aware, embracing renewables could be what gives your company the cutting edge over its competition.