Increase profitability through these 6 simple steps
In this post, I’ll share 6 ways for small business owners to increase profits. We know that, when comes to profit, small business owners often feel like they’re on a roller coaster ride. Whether you’re just starting up or you have an established business, you’re likely experiencing some ups and downs.
One year your profit is great and the next year you might not be able to avoid a loss. This is especially true when unexpected events like the coronavirus pandemic throw a wrench in your plans.
If you’re unsure if the sum of all the financial decisions you’ve made will ultimately equal a profit or loss at the end of the year, here are some concrete steps you can take to put yourself on the path to consistent profits.
1 | Set a Goal and Make a Plan
First, start with the basics. Set a goal for increasing profit. What are you trying to achieve? Do you want to increase your small business’s profit by 10% compared to last year? Hit a specific number by a certain date? Make your goal specific, realistic, and time-bound. Realistic goal setting is the most important of the ways for small business owners to increase profits over the long run.
After you’ve set a goal, creating a financial plan is a vital next step. As Antoine de Saint Exupery wrote, “A goal without a plan is just a wish”. A financial plan is like GPS for your small business. It helps you:
- Chart the course to your desired destination
- Navigate roadblocks you encounter along the way
- Measure whether you are on track to achieve your profit goals
A CFO will develop a financial plan based on knowledge of your business, goals, historical financial performance, and what’s feasible in the current economic environment. Not working with a CFO just yet due to budget constraints? We offer consulting services, along with packages specifically for start-ups and small businesses.
2 | Understand Your Numbers
Understanding your numbers and how they affect the profitability of your business is one of the most important ways for small business owners to increase profits. But where should you start? Well, your bookkeeper records all the financial transactions that occurred during the month. In addition, she should provide a few basic financial reports that summarize what happened.
Need a good bookkeeper? We’re happy to recommend a few great ones here in San Diego. Drop us an email.
If you didn’t study finance, you may feel intimidated or confused by those bookkeeping or financial roll-up reports. You are not alone. If you don’t know the differences between an income statement (a.k.a “P&L”), balance sheet, or statement of cash flows, not to worry. Ask for help. Here at Momentum CFO, we conduct monthly financial review meetings for all of our clients. What’s included:
- Easily understandable charts so you can visualize your financial results
- Analysis of your financials, and an explanation of why they occurred (in plain English vs. finance jargon)
- Identifying early warning signs of potential problems that can decrease profitability
- Comparing the results to your plan to ensure you achieve your goals
- Providing clear recommendations for improving profit
3 | Evaluate Your Pricing
A third way to boost profit is evaluate your pricing strategy. You may learn that your products or services aren’t optimally priced.
How did you originally set your prices? Was it based on “gut feel”? Did you research current market conditions and your competitors’ pricing?
If you don’t have a clear advantage over your competitors, too-high prices can result in lower sales volume. Customers can buy a similar, lower-priced product or service elsewhere.
If your pricing is too low, your sales volume may be high, but you’re probably leaving money on the table that could boost your bottom line.
In addition, when you set your prices, did you account for all your costs of doing business? Your total costs aren’t just the direct costs of the labor and materials it takes to produce your product or service. You also need to factor your general business overhead expenses (e.g. rent, office supplies, software applications, administrative staff support, etc.) into your pricing.
Your prices should reflect your direct costs, indirect costs, and an appropriate markup to generate a profit. If you haven’t had a moment to really sit down and figure all this out, fill out our contact form and let’s see how we can help! And remember pricing is one of the subtle yet powerful ways for small business owners to increase profits over time.
4 | Analyze Product and Service Profitability
Do you know which of your products and services are the most and least profitable? It’s not uncommon for small business owners to be unaware that they’re losing money on some of their products and services. Some business owners deliberately sell their products at a loss to gain market share from their competitors. However, unprofitable sales aren’t a sustainable long-term solution.
Analyzing product and service profitability involves reviewing your prices, discounts, and the total costs of your products and services. When you know how much profit or loss you’re generating, you can make better decisions about what to do next. Working with a financial consultant or a CFO can help you with your pricing and discounting strategies. Furthermore, they can identify ways to reduce your costs of production and delivery.
5 | Take a Close Look at Expenses
If you’re looking for ways to increase profit, take a close look at your monthly expenses. To boost your profit by cutting expenses, first identify which of your expenses are necessities for running your business. Necessities include expenses such as rent, cost of goods to produce your products, and business insurance.
Second, look for expenses you can reduce or eliminate. Ask yourself questions like am I:
- Paying a recurring monthly fee for a product or service I no longer use?
- Spending too much on meals and entertainment?
- Setting spending limits for my employees? Or, are they buying whatever they want, whenever they want?
Few small business owners relish cutting costs because it implies that they must give up something. We can help you be creative and find ways to reduce your expenses! Some tactics we’ve used with other clients include:
- Renegotiating contracts with your suppliers
- Refinancing high-interest rate debt (more on this below)
- Analyzing the return on your investment on marketing or other services intended to increase sales
6 | Refinance High Interest Rate Debt
Small business owners often finance the growth of their business with loans. However, high loan interest expense can substantially decrease your profit.
Are you generating a consistent annual profit? If not, you’ll have limited options for securing a loan. Furthermore, if you don’t meet the lending criteria set by commonly known financial institutions, you might turn to smaller online lenders. These are a great option for small businesses and startups. However, small online lenders provide that much-needed cash at a high cost. In addition, loans from these lenders frequently carry high double-digit interest rates that can exceed 30% APR. Reducing high-interest debt is one of the more powerful ways for small business owners to increase profits.
We excel at working with small business owners to generate higher, consistent profits so you can qualify for loans at reasonable rates. Furthermore, we’ve helped numerous clients refinance and consolidate loans.
As an example, we recently helped a small business reduce their monthly debt payments by over 70%! Now that’s a good return on investment!
A business can’t stay in business for the long term without healthy profits. Therefore, by taking the steps outlined above, you can reap additional benefits such as:
- Opportunities to grow and expand to new markets or locations
- Ability to hire more employees and incur new expenses that help you grow
- Better chances of being able to borrow money at reasonable rates
- Ability to attract better investors
- More cash in the bank
- Increase in the market value of your business
- Peace of mind that you are on the path to financial success
Need more help boosting your profit? Book your free consultation today and let’s work together to grow your business profitably!