Small businesses can be profitable if you know how to increase profit in a small business.
Increasing profits can result from any one of three; activities: decreasing expenses, increasing margins, or increasing revenues (sales). These are:
(A) Decreasing Expenses
Expenses are like weeds; they have a natural tendency to spread and to grow. Left alone, expenses won’t stop spreading and growing until they overtake everything in their path, profitability included.
It is the entrepreneur who must make a cast-in-stone commitment to contain his or her company’s expenses and live up to fulfilling that commitment.
Once that cast-in-stone commitment to control expenses has been made, here are some tips on how to make it happen.
- Technology is cheaper than people: Purchase user-friendly software in lieu of accumulating additional employees. Areas such as accounting and bookkeeping, inventory control, accounts receivable, and payroll lends themselves to the software. Wherever possible, let technology, not people, do the detail work.
- Recognize and reward: The best way to develop and expense-aware culture is to publicly recognize those who are responsible for controlling the expenses, and reward them once they’ve done their job.
- Zero-base budgeting works like this, at the beginning of each budgeting year, your individual expense accounts are absolute zero like they would be if you were starting the company from scratch. Then question every unit of taka budgeted to every line item, (in other words, yesterday’s expenses are not necessarily today’s.)
- Remember that expense control is not only a profitability issue, it is also an important element of controlling cash flow. And since lack of cash is the number one symptom of small business failure, how better to begin building a solid foundation than to begin by controlling expenses?
- Recognize that the need for expense control is forever,
- Put the responsibility for controlling expenses where it belongs.
- Don’t wait until a crisis arrives
- Avoid over-staffing
(B) Increasing Margin
There are two ways to increase margin; the first is by increasing prices, the second by decreasing the cost of goods sold. Significant taka can be found in both.
As simple as it may sound, an increase in price does not come without its downsides. Sales volume will probably pay the price as low-balling customers take their business elsewhere. Will you miss them? Probably not! Often they are the same folks who beat you upon delivery and take 90 days to pay their bills.
Decreasing the cost of goods sold can be an easier and less dangerous approach. Usually, this process involves seeking price reductions and/or better service from current suppliers or finding new suppliers with lower prices and/or better service.
(And don’t forget the incoming freight account; there are plenty of excess-dollars-without-off-setting-costs to be found there, too).
(C) Increasing Revenues (Sales)
Finally the fun part, for most entrepreneurs anyway. Increasing revenues include the hiring of new salespeople, the introduction of new products, the uncovering of new markets. The kinds, of things most entrepreneurs are bred to do.
But adding revenues does not come without adding risk. There are real and tangible costs involved. Salespeople must be hired and trained, new products developed and introduced, new markets located, aid roost of all, new infrastructure must be introduced to handle the increases sales volume.
And remember, when planning pushes your sales, not every sale is a profitable sale – there is good one’s sand there are bad ones. Good sales are to customers who are willing to pay a fair price and willing to pay their bills on your terms. Bad sales are to customers who are unwilling to pay a fair price and unwilling to pay their bills on your terms.
The correct way to make a push to increase profitability? In the order outlined above – first, make a beeline for expenses, then attack margin, and finally, pursue increased sales.
Don’t drive into all three at once and don’t expect to achieve the desired results by yourself. Involve the team in the effort, set goals for everyone, focus on what you can reasonably achieve, and broadcast and reward the progress you make.
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