When it comes to increasing your profitability, there are only two parts of your business that have any impact – your revenue (or sales) and your expenses. But within these areas there are a number of improvements which you can make starting today.
Start by checking your exact costs
Whatever product or service you are selling (or hoping to sell) you need to know exactly what it is costing you to provide it. Not a guess or estimate but an actual cost that covers everything. This includes raw materials, ingredients, shipping costs, packaging, marketing, fuel costs and every other item which you have to pay for to be able to sell it to your customers.
One of the most common problems that occurs in small businesses is that they are marketing and selling their services or products without knowing if they are covering their costs and how much margin they are making on each service or product.
So, regardless of how successful they seem to be, they are not making a profit or enough profit that actually warrants them being in business.
Once you know your exact costs you can immediately spot which of your products or services are the ones you should be focusing on and which ones will need a change in price to be worth continuing with. This means you are immediately working on increasing your profitability.
Can you reduce any of these costs?
Now you have accurately recorded your costs it is time to see if there is any way to reduce them. Or possibly even remove them.
Did you get quotes from suppliers to see if you can get a better deal? Often in business you are so busy that you just buy what you need when you need it and don’t worry about whether or not it is the best price you can get. Unfortunately this lack of detail checking in the beginning can be costing you profit on an on-going basis.
Another area to be aware of is adding unnecessary extras which your customers don’t want or don’t see as giving added value. They may like that the packaging is made from recycled materials but aren’t willing to pay the extra cost that it brings.
The best way to check this is by offering the product or service in 2 different forms – a basic and a luxury. Price the basic at the same price as you are currently charging and offer the luxury with the extras that customers seem to want but charge a higher price. You will quickly find out which is the most popular and it doesn’t matter which it is because by charging more for the extras or the same for less extras you will be better off either way.
Ensuring that you are paying the best prices and not adding unnecessary extras are other ways of increasing your profitability which you can implement straight away.
Now let’s focus on your revenue
As profitability is measured by revenue minus expenses then finding ways to increase your revenue is a great place to start when it comes to increasing your profitability.
Have you ever been to McDonalds and been asked if you would like fries or a drink or dessert with that when you place your order? Even the automated kiosks suggest you might want to add something more.
What about your business – could you offer extras that your customers could purchase or bundle a set of services together to make a larger package? Certainly not all of your customers will say yes (just like not everyone at McDonalds buys more) but if some do then you have increased your sales without having to add a single new customer into the business.
Consider also that you could offer a repeating service or set of products to existing customers. They order what they prefer and have the same order delivered every month until they choose to cease the deliveries. Or perhaps you could offer special extras at certain times of the year such as before holiday periods or as a mid-winter or spring offer.
Selling more to existing customers when they buy from you is a relatively easy way to increase your profitability – and it takes very little work to have a go at it.
What about your price?
Now that you have carefully analysed your exact costs it’s time to make sure that you are charging the right price – and by that I mean the highest price you can while still ensuring that your customers believe it is good value.
Are you undercharging or overcharging or getting it just right? It is really important to know because selling services and products for less than your customers would be willing to pay is definitely reducing your profitability. And pricing them too high will reduce the number of people who will want to buy them.
And while you are analysing your prices carefully be aware that you may decide that you have some products or services or even customers that you need to cut from your business because they are not meeting the level of profitability that you require.
Don’t be sentimental about any part of your business – it either is worthwhile or it isn’t and the sooner you clear out this dead wood the quicker your business will be able to grow in a better, healthier way.
Know which of your services and products bring in the highest profit levels and it will be easy to determine which ones you should be promoting to increase your profitability.
How easy is it to buy from you?
Do you make it really easy for customers to find you and buy from you? If you are highly visible and have incredibly simple ways for people to buy then you will have more revenue and will be increasing your profitability.
You could use technology to make placing an order or tracking it’s delivery really easy or maybe use a reminder system to let customers know that they may be ready to re-order or book another appointment.
The easier it is for people to buy from you the more likely it is that it will happen. Everyone is really busy (or believe they are really busy) and having convenient buying systems will be seen as a bonus for many of your customers.
It’s time to check out the other side to your profitability
Doing everything you can to increase your revenue is great but you can also increase your profitability by reducing your expenses where possible.
I have already covered how you need to get the best price possible for everything you buy but what else can you do?
How well are you managing your inventory?
Producing or buying more stock than you need just in case sales suddenly increase is often nuts because, if sales don’t suddenly increase, you are tying up your money in inventory which could be deteriorating or going out of fashion. And that’s a great way to decrease your profitability.
So what else could you be doing instead? Having systems and processes which mean you can respond to increased sales when they happen rather than carrying extra stock is a great starting point. Do you track your sales carefully so you know where they come from and what affects them on a seasonal basis? That will help you to determine how much inventory you should be carrying on a regular basis.
You should also be determining which products turn over quickest and which are only selling occasionally. It doesn’t mean you won’t continue to sell those products but it may mean you decide to stock less of them at a time.
Controlling your inventory whether it is raw ingredients or raw materials or finished products ensures that you only have what you are going to sell in the near term. This ensures that you don’t waste money on stock that could be unusable or needs to be sold at a discount at a later date and that is what increasing your profitability is about.
Can you cut any expenses?
Because you detailed all your expenses to determine the exact costs for your services or products you can now use this information to check out what expenses you can reduce or remove completely.
This will allow you to have a lean business where everything you spend money on is necessary and contributes towards creating revenue in an effective way.
Can you reduce your vehicle expenses by planning your days and trips better? Can you ensure you don’t waste raw materials or packaging by having better processes? Every small change you make in reducing your expenses is increasing your profitability.
Every business is different when it comes to expenses and everyone will make different decisions about what is necessary and what isn’t. That’s fine. There isn’t a formula or rule book for what you should or shouldn’t spend money on but sitting down and personally justifying everything you are buying is a great way to find out if you are spending more than you need to.
The final hurdle to leap
Throughout this article I have suggested methods of increasing your profitability in easy to follow steps but these methods make a big assumption. And that is, that you are analysing your finances regularly.
If you don’t regularly check your cashflow and measure your profitability then you will never know how you are doing and what you should be doing better. Sadly, many small businesses wait until the end of the financial year to analyse how they performed and are devastated to learn that they performed terribly.
Checking all your financial data on a monthly basis gives you 12 times more opportunities to make improvements throughout the year and will help you to arrive at year end with the kind of result that you really want to see.
Ignoring your financials doesn’t make them improve and yes you do have time to do checks every month – because this is an essential task in your business. You may need to ask for advice on setting up and maintaining a cashflow forecast (or even to find out what it actually is) but seeking that advice is better than dreaming of business profitability and never achieving it.
You also need to understand the basic accounting equation and how profit is measured before you can determine where you are now and where you want to be. Sometimes the language used can seem difficult but actually you can learn what it means easily, just the same as you learnt the technical language you use in your business now or have used in work in the past. Here’s an article I wrote about business accounts which you will find helpful how to understand business accounts even if you hate accounting
Do you want to increase your profitability?
I am assuming you are saying yes or at least nodding your head at this point. If you follow these easy steps and put some time into checking the numbers, being creative with ways to bundle more into each sales and focusing on what you are spending your money on then increasing your profitability will become a regular routine which you will be glad you started. So what are you waiting for? Start your counting now.
©Robyn Forryan 2020
The Biz Coach NZ