The New Year is a time for reflection and planning. For small business owners, that means reviewing your year-end financial statements to see how you did and planning for the future. If you’re interested in improving your business’s financial image, here are five ways to boost profits.
1. Small Markup vs. Big Markup:
It’s important to focus your efforts and know what works best for your company. If your business has a small gross margin (think: small mark-up) cutting costs by letting people go or focusing on growing your sales alone will have a small impact on your profitability.
If your business has small margins, spend more time trying to reduce your direct costs (costs that go into every single sale). Reducing your direct costs, like the cost of material per unit, will drastically improve your profitability. Similarly, if your company has a big gross margin (big mark-up), cutting costs that go into every single sale won’t help you as much as growing your sales or cutting your operating expenses. Let’s look at an example:
2. Silver bullets make you look good, but they don’t fix the source of the problem:
The table above seems to explain it all, but remember these are short term solutions. Profitability problems are rooted in two deep and nuanced issues that companies can face: demand and efficiency.
Demand: Demand is the underlying force that drives economic growth. Ask yourself the following questions when evaluating the demand for your products or services:
- Do people want the thing you’re selling?
- Do they want it at the price you’re selling it at?
- Are there enough of these interested people out there?
If not, your business will likely not get enough sales to sustain the bare minimum of costs needed to operate.
Efficiency: When running a business, it’s essential that you’re efficient and well organized. Inefficient operations can quickly impact your profitability. Consider these questions when assessing the efficiency of your business:
- Are you able to make something that meets customer demand?
- Can you organize materials, labor, or goods from vendors to provide your products and services to customers at a price they want and with enough money left over to pay your company’s bills?
- If your customers want what you have to offer at a lower price, is it possible to change how you make your goods or services to meet their needs?
3. Track your refunds and discounts:
Refunds and discounts can be a hidden cause of profitability problems. That’s because you can have the right pricing, costing, and control of your overhead and still have losses if you’re issuing too many refunds and discounts.
This comes down to how you do your books. Many bookkeepers just lump discounts and refunds into your sales figure. Encourage them to separate these costs out into discrete figures that offset your total revenue. That way you can track their amounts and set goals.
4. Small costs add up:
Doing a vertical analysis of your profit and loss statement can help you figure out what’s holding back your company’s profitability, but there’s a catch. Vertical analysis shows you how much each expense contributed to your profitability and those that represent a bigger share stand out the most; however, that doesn’t mean you should only focus your efforts on those costs.
Business owners tend to focus on controlling big costs like labor but tend to be less attentive to small costs like office expenses, and dues/subscriptions. Set yourself a budget for all these small costs and monitor them over time. It will help you reach your target profitability.
5. Bundling can help you meet your profitability goals:
Two factors contribute to your total sales: how many customers you have and how much each of them is spending. When your average revenue per customer is small, it may be difficult to make enough sales to meet your profitability goals. Consider creating product or service bundles to change this. By combining your offerings, your average check will increase, making it easier for your business to break-even, and you may find that offering them together creates a totally new benefit for your customers.
The New Year offers a renewed time to set goals and plan for the year ahead. Take advantage of this time of year and follow these five best practices now to increase your profitability in 2019.