Profit margins are vital in terms of knowing what your business actually has financially, especially with a small business. Where you stand as a company helps you realize potential growth and your goals.
It’s not enough to bring in revenue. If more time and money is going out the front door than revenue coming in, you have a serious problem. Some businesses and products have small profit margins, there’s not much you can do about that.
Here are some tips for improving your profits.
Figure out your gross profit margin
You need to know where you are in order to plan for where you want to be. Know your up-to-date, overall gross profit margin. It’s no good using estimated inventory figures or working from the figure in your last Annual Financials. Prepare some interim accounts to the last month-end.
Your overall gross profit margin could be deceiving. Find out the gross profit margin on each of your products and services, and analyze your gross margins over different product categories according to your business. This way you can identify both low margin or loss-making items and profitable activities or products. You may want to stop selling low margin products and focus on the ones that work.
Consider increasing your prices
Do you charge all customers the same price? You’ll invariably find that some customers are less price sensitive than others. Have you increased your prices to match supplier price rises and kept up with the competition? Yes, I know it can be difficult. But often small business owners are more worried than the customers about price. You might lose a customer or two, but that’s the nature of any business. Think of it this way: if your margin is 50 percent, a 10 percent increase in prices means you can lose 17 percent of your customers yet be no worse off.
Reconsider discounts
Discounting can be the death of many small businesses that don’t realize how badly this destroys your margins. At that same margin of 50 percent, if you discount your prices by 10 percent, you need a 25 percent increase in sales just to stand still. Don’t throw around those discounts without first considering the cost and benefit of such an action.
Don’t compete on price
Differentiate yourself in other ways, whether by giving superior value, going the extra mile or reducing all the other costs of doing business.
Take cash discounts from suppliers
It’s usually a better deal than trying to delay payment, even if you’re borrowing.
Prevent theft
Whether stolen by staff or customers, losing cash or inventor can be costly. Do you have anti-shoplifting or theft prevention systems in place?
Watch supplier bills
Take time to check your bills personally. After a while you’ll get a feel for things which aren’t right. Don’t be surprised to find that you’ve been overcharged for goods or services you haven’t received or been billed at the wrong prices It happens.
With any business, if you understand how important profit is, you are on the right track. Businesses need to push for greater margins. And if you can continue to deliver the quality that your customers expect, your SMB should thrive.
