Too many business owners chase turnover as a benchmark for their success instead of profitability. It’s simple…if there is no money left at the end of the month, it doesn’t really matter how much your turnover is…
The best way to fatten your bank balance as a small-business owner is to increase your profit margins. Some of the steps that can help you improve your bottom line may seem scary — but they shouldn’t be. Rather than clinging to the safety of a pricing or sales strategy that may be slowly draining your resources, making a few changes can improve your bottom line. Try these five tips:
Increase your profit margins
1. Know your margins
The first step to optimizing your profit is understanding it. It is a good idea to look at your gross profit margin often and break it down by clients and products or services. You can use this simple equation:
Gross Profit Margin = (Revenue – Cost of Goods Sold)/Revenue
For example, if you bought a chair for R50 and sold it for R100, your gross profit margin is 50 percent.
2. Cut Costs
Talk to your suppliers about pricing and find out if they have any special offers. There may be better pricing available for those who simply inquire. Be the squeaky wheel. When you buy new equipment, look not only at the purchase price but at the operating costs for competing models.
3. Raise your prices
This can be a sticking point for small-business owners. If you have a service business, raising prices can feel personal and scary. But at the end of the day, pricing is one more piece of information about your business. Price is one way to convey the message that what your offerings are of higher quality or greater value than your competitors’.
Raising prices may cause you to lose a few customers, but your profit margins grow even if your revenue stays flat – and that means more money in your pocket.
4. Heed the 80/20 rule
This titbit of economic wisdom that says 80 percent of your business income will come from 20 percent of your products or services. This is where keeping a close eye on your gross profit margin is essential. Calculate your gross profit margin on each individual product or service your company offers. It’s likely that some of them are dead weight and can be eliminated, while others pull more than their share of the weight. Streamline your offerings to include just the most profitable and you can use the energy that frees up to create something new and wonderful to wow your customers.
5. The 80/20 rule; part 2
The rule applies to customers as well: Twenty percent of your customers probably account for 80 percent of your business income. Calculate your gross profit margins by client or customer type. The Clients who require a dozen phone calls before they will commit to the project and another dozen before they pay a deposit are eating into your profit margin. Don’t be afraid to detach from unprofitable clients. Identifying your best clients or customers and working on attracting more just like them is one of the best ways to beef up your bottom line.
Luan van Rhyn is a registered Professional Accountant (SA) and Chief Dreamer and Founder of Calypso Accounting. Luan and his team are passionate about helping SME’s grow and streamline their businesses and are continuously looking for ways to help improve their clients’ bottom line.