A business that brings in a lot of revenue isn’t always successful. Sometimes robust sales can hide the fact that a business isn’t doing well financially. Why? Because there’s a big difference between sales and profit— but entrepreneurs sometimes confuse the two. If you want your business to be successful, you need it to be profitable.
“From a 30,000-foot accounting standpoint profit/loss is what you have left after deducting all expenses from revenues,” explains John Bartelme, a Chapel Hill Durham SCORE mentor. “Therefore, to be profitable you need more revenue than expenses or less expenses than revenue. Sounds logical and simple enough, but as they say, the devil is in the details. Therefore, a much deeper dive into both of these areas is always necessary.”
Here are 13 changes worth considering to make to help your business more profitable.
1. Conduct A Cash Flow Analysis
“The numbers don’t lie,” is a popular saying for a reason. “Understanding cash flow and performing a cash flow analysis on a regular basis is key to remaining solvent and improving profitability in any business,” says Sara Raleigh, former SCORE Cape Fear chapter chair/mentor. “A cash flow analysis allows for a complete review of costs towards understanding how a business generates money and helps identify opportunities to strategically reduce costs.”
No clue how to begin to analyze your cash flow? Your accounting professional can help you crunch numbers. You can also get free advice to make your business more profitable from a SCORE mentor or your local Small Business Development Center.
2. Boost Sales
It may sound obvious, but you can’t improve profitability on sales you aren’t making. “Determine sales objectives; set goals and get ‘buy-in’ from your people,” advises Raleigh. “Regularly review results for the business– and by sales associate— holding people accountable as well as considering a reward system for exceeding the plan,” she recommends.
If you are the sales team, the responsibility for selling falls squarely on your shoulders. You may need to consider bringing in a salesperson.
“A tip that I often suggest entrepreneurs go through is to review their entire sales cycle and determine which areas they can outsource,” says Kedma Ough, author of Target Funding. “If you are charging $100 for your time and you can hire someone to produce the same work at $20 you are leveraging your time so you can be more profitable and obtain more clients.”
Other low-risk strategies can include focusing on upsell opportunities to your existing clients or customers, or a strategic move into a new target market.
3. Diversify Revenue Streams
Rely on a few major clients, or a few products, to bring in your income, and if one goes away your business may flounder. Take an honest look at your product and client list to identify whether your business is vulnerable. Then consider adding new products or adjacent services.
A restaurant might sell jarred sauces, or add catering services, for example. A consultant might add books or courses to her one-on-one services. A local business might expand into a new market, and perhaps even consider exporting.
4. Clear The Clutter
Fans of the hit television show “The Profit” know that when Marcus Lemonis invests in a business, one of the first things he always does is evaluate what’s selling in order to cut items that aren’t contributing significantly to the bottom line. “Performing a sales analysis per square foot, product and/or category to identify both high and low performers. This allows a business to buy more effectively” Raleigh says.
But just like it can be hard to get rid of clutter in your home, it can be hard to get rid of clutter in your business. Whether it’s products or services that you offer, those that aren’t contributing much to the profitability of your business are wasting space, time, or both. Let them go.
5. Optimize Your Pricing Strategy
If you’re not making enough money, it’s possible you’re not charging enough. This can be particularly true of service-based businesses where undercutting the competition may bring in clients that don’t appreciate the value you provide. But it can apply to products as well.
Because it’s so easy to shop prices online, you may feel pressure to keep them low. But if everyone shopped solely on price, we wouldn’t have luxury brands that can charge many times the price of a comparable off-brand product. “(Review) pricing strategies to determine if price increases may be justified and warranted based upon the marketplace and competition,” Bartelme recommends. Don’t be afraid to experiment. “Many times it is more about pricing ‘courage’ than ‘strategy’,” he says.
6. Cut Expenses
Remember the equation: Profit = Revenue – Expenses? In addition to increasing revenue, you may need to reduce expenses so that profitability goes up. Review your financial accounts carefully for business costs you can trim.
Another helpful exercise: Review your business bank account and credit card statements every day for a month. You may be surprised to find you’re paying for things you don’t use or that don’t bring significant value.
Refinancing business debt or obtaining better terms with vendors can lower your costs and improve your cash flow. Something as simple as a 0% APR or balance transfer on a business credit card may give you more money to spend on sales and marketing.
Also be sure to evaluate overhead costs “that might be out of line relative to direct costs,” says Bartelme, adding that they “have a way of sneaking up when you are not watching.” Raleigh recommends reviewing opportunities to reduce rent or square footage. In addition, some service businesses have found success by allowing employees to work from home either part-time or full-time, thereby saving money on office space.
7. Learn How To Pitch
Poor communication skills can have a direct impact on your business. “Many entrepreneurs miss out on the power of public speaking and how it can position your business to bring in more revenue,” suggests Ough. “Business owners may understand their unique proposition but may not leverage public speaking to create a sales pipeline for their product and service.”
Ough believes that “improving your presentation skills can double your business income in a relatively short time frame and eliminate the need to cold call anymore.” If the thought of pitching your business on stage terrifies you, or if you think your presentation skills could use some polishing, Ough suggests joining an organization like Toastmasters or the National Speakers Association. “(It’s) a great way to improve your speaking and build a new sales channel for additional business profit,” she says.
8. Increase Customer Retention
You’ve probably heard advice that landing a new customer is much more expensive than keeping a current customer. For many businesses, it’s true. Research by Bain & Company, for example, found that in financial services, a 5% increase in customer retention produces more than a 25% increase in profit.
What is your customer churn rate? How can you lower it? Are you using effective incentives to encourage customer loyalty? Can you do a better job of cross-selling to your current customers?
Improve on customer retention and sales per customer and you’ll likely see a boost in your profit margins.
9. Invest In Technology
Small business owners sometimes rely too heavily on manual systems and processes. Automation tools can save time and money, allowing you (or your employees) to focus on higher growth activities. Whether it’s accounting software to make your bookkeeping more efficient, or AI tools to help you improve your social media marketing, it’s never been easier or more affordable to upgrade your business tech tools.
10. Analyze Data For Ways To Improve Profitability
While many people think of a successful small business owner as someone with great gut instincts, business owners who experience long-term business success are often data driven. They know their key performance indicators (KPIs) and are constantly looking for ways to improve them.
Start by identifying the data you are collecting and look for gaps. Valuable data you can use to improve profitability may be gleaned from financial statements, customer behavior or surveys, or even market research you can use to benchmark your performance against similar types of businesses.
11. Prepare For Cyclical And Seasonal Fluctuations
Almost every type of business has some type of seasonal or cyclical sales fluctuation. The key is to prepare and find ways to mitigate the impact on the business.
You may need to line up short-term financing so you can stock up on inventory ahead of a busy season, for example, or to cover expenses when there is a sudden dip in sales.
Or you may want to find ways to extend your season, or increase sales during a slow time, even if that means net profit takes a hit during those times.
12. Build Business Credit
You can’t be profitable without sales, and unbeknownst to some entrepreneurs, business credit can cost you those sales. Nav CEO Levi King learned this lesson the hard way. His first business was a sign manufacturing company. He was young, hungry, and willing to do whatever it took to grow his business. He bid on a quarter million job that he said would have made his year. Though he knew he submitted a competitive bid, he didn’t get the job.
After hounding the person handling the bid to tell him why the prospective client went with a company that charged more, his contact showed him their bid. King recounts his shock as he reviewed it, “Right there in their bid proposal was a copy of my business credit report, and it wasn’t good. The sad part is, it wasn’t good because I’d bought this company that had been in business for 52 years and I inherited all their (bad credit) and didn’t know it.” As he learned, prospective clients and partners can check your business credit— no permission or notification is required. Failing to monitor your business credit could cost you valuable business opportunities. You can learn how to check business credit scores with Nav.
13. Explore Financing Options For Growth Opportunities
Expanding into a new location or a new market, or adding more products or services, may take an upfront investment of capital. If your research and business plan point to likely success, you may want to take a calculated risk and use small business loans for business growth.
Whether it’s a small business line of credit to support ash flow, a term loan to purchase new equipment or a commercial real estate loan to open a new location, financing may help you take that next step in your business.
As you work on improving your profitability, be prepared for lean times. “It is not unusual, in fact normal, for start-up’s not to be profitable for some period of time,” Bartelme observes. “So, it is always very important to have enough money to cover likely losses in the first few months, even quarters, of a new business. One rule of thumb is to double whatever is projected from a time and money standpoint to make your business profitable.”
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2 responses to “Business Profitability: 13 Tips for More Revenue”
#’s 4, 6, and 7 are my favorites