A business owner once told me that she asked her Accountant how to increase business’ profits. The accountant replied: “Increase revenue.” Many business owners believe that you must increase sales and revenue to make more money. However, there are many other ways to improve profitability.
A better way to increase profits is to increase profit margins. Your business remains with the same overhead costs, same production capacity and gets more profits. At Profitable Wisdom we specialize in finding profit increasing opportunities in your business and putting them into action. The following is a list of some of the ways you can increase profitability:
Determine gross margin
Also, make sure you know your up-to-date, overall gross margin. You must not use estimated inventory numbers or the last known profit margin from the last Annual Financials. Get the most precise and up-to-date numbers you can get. Compare your gross margin to the previous year and to the industry average. How does it compare to the industry average and is it increasing or decreasing compared to last year? Get the answers and other important considerations by contacting us.
Study gross margins
The overall gross margin could be deceiving. It is important to determine the gross margin at a more detailed level. Ideally, this should be done on each of your products and/or services or depending on your business, at least analyze your gross margins over different business divisions, product categories, suppliers or customer categories. This will allow you to identify low margin or money losing products or services as well as the more profitable ones. Remember that sometimes the more profitable are not the highest priced items. For manufacturers, gross margins by product may also be deceiving because of constraints in your processes that Throughput Accounting can help reveal. Once you have this information, a decision can be considered to stop selling low margin lines and focus on the ones that get more profit. However, it is important to consider other factors that could impact your overall sales and profits, like the dependence of selling a low margin product to sell a high margin product.
It seems kind of obvious and for sure it can be difficult in a competitive market. But surprisingly, we business owners are usually more concerned with pricing than our customers. Your own overheads keep going up all the time and these increases should be passed on to the clients too. The risk is to lose some customers, however, customers who choose to leave because of price alone are not usually your best customers. To illustrate this, if your margin is 50% and you decide to do a 10% increase in prices, you can lose 17% of your customers and still have the same gross margin with lower costs and more profits!
Financial Review of Major Decisions & Opportunities
Often owners of small and medium sized businesses make decisions on a gut feel. The only exception would be when financing is needed and they are forced to make some financial projections for their financial institution. Before large commitments are made, it is important that all major decisions be reviewed financially and compared against the strategic visions for the business. Measures such as Return on Investment, Break-even Analysis and Pay-back period should be determined with optimistic, realistic and pessimistic scenarios developed. This is one of the areas that a Part Time CFO can be a key strategic partner for business owners. Get assistance with financial decisions and other important considerations by contacting us.
Careful with providing discounts
Discounts can be dangerous. Providing a customer with a discount can be very hard to make up for. Going back to our example, with the 50% margin if you discount prices by 10%, you need 25% more customers to compensate the losses. While it is tempting to generate more sales by providing discounts, only give them when you get discounts from your supply chain or when you want to get rid of old inventory. In most cases, do not offer discounts to increase sales.
Take cash discounts from suppliers
When a supplier offers a cash discount, it is always better to take it instead of delaying payment, even when borrowing. If your suppliers offer volume discounts or incentives, it is important that you have processes in place to ensure that you receive all the discounts you are entitled to.
You can realize a great deal of savings by finding ways for staff and processes to avoid the 8 areas of waste. These areas are waiting, overwork, rework, motion, transportation, processing, inventory and intellect. Productivity and efficiency improvements can likely be found in all areas of your business including the front office, factory floor, sales team and service staff.
Developing a clear vision for the future, analyzing the current situation, developing strategies to make your vision a reality and implementing those strategies is important to increasing profits. It incorporates all the other approaches to increasing profits and ensures that decisions are in line with the company’s purpose and strategies.
By itself, Financial Forecasting does not increase profits, but it does allow Leadership to make informed and wise decisions that lead to more profitability and stability. Without forecasting, poor decisions can be made that end up wasting money. Poor forecasting leads to problems such as inadequate capacity or insufficient cash flow.
Increasing your profits is all about making the most of what you do right now. Need help setting some profit increasing strategies? Do you want some guidance to find out the best methods to apply to your business? Contact us at Profitable Wisdom, our specialty is to make your business more profitable.