In the last article, we went over business growth. I demonstrated that instead of worrying about growth, you should first focus on increasing your short-term profitability.
Here are six tangible ways you can make your business more profitable.
1. Know thy costs
A common mistake for businesses is to not know all of their costs. For example, businesses that build homes or other high ticket items sometimes fail to account for all of their costs when quoting prices.
The parties ink the deal for the quoted amount. Once the costs are all added up in the end, the business realizes it will not be getting the profits it originally thought.
Don’t make that mistake.
First, know your material costs as precisely as possible. Don’t make educated guesses or take a “close enough” approach. Know exactly what they are.
Also, know what your material costs are currently. Don’t rely on cost information you learned in the past—even in the recent past. Prices can fluctuate without much notice.
Be sure to account for other costs, too. For example, are you calculating all of your labor costs into your quotes (everything from benefits to insurance you pay in connection with having employees) and your overhead costs?
2. Downsize or “right size” your business
You might be familiar with the Pareto Principle or “80/20 Rule.” You can research it more, but it brings up some questions worth considering. For example, are you making 80% of your profits from 20% of your offerings? Or, are 20% of your customers tying up 80% of your resources? You can read more examples here.
Investigate ways to shift your business’s attention towards activities that generate more revenue and cost you less.
Another key aspect of downsizing or “right sizing” your business is to remain within your competency. If your business is growing too quickly right now, you might not be able to keep up with demand. When that happens, the quality of your product or service suffers which will hurt you in the long run.
You might also be throwing a lot of time and resources at trying to meet this demand. If you haven’t planned in advance for these costs, you’re probably paying a premium for them.
Downsizing or “right sizing” a business can be difficult. It might mean having to lay off employees. It could also mean having to turn away business from customers who are eager to pay you. Big gains in business don’t come easily, though.
3. Run your business better, faster, and cheaper
If it currently takes you 600 hours on average to build the product you sell, how can you shave it down to 500 hours? Imagine the impact this reduction could have on your business.
It starts with your team. Get the right people on your team and invest in training them. You want people who can do the job right the first time. It’s tempting to put training on the back burner so that you can rush out the door to fight fires. Resist that temptation.
You also need ways of motivating employees. Offer them incentives for improving their speed and performance.
Work on designing more efficient processes, too. Question everything you do. For every task you perform, ask yourself if it’s absolutely necessary. Also ask yourself if you’re doing it in the best and most efficient way possible.
Once you’ve improved the efficiency of a particular process, document the steps and make it a standardized practice.
4. Lower your “cost of money”
Don’t underestimate the impact of interest rates and other loan terms on your profits. Dropping your interest rate from 6% to 4%, for example, could make a big difference in how much you pay the bank each year. Stretching out when payments are due can also help.
Explore with your banker ways of restructuring or refinancing existing loans. When shopping for a new loan, get quotes from several banks (some local, some national). Compare interest rates and select the best one you can.
To avoid having to borrow as much, work on ways to free up cash currently tied up in your business too. Look into reducing both your inventory and your receivables.
5. Beware of giving discounts
Pretend your profit margins are currently 30%. Now let’s say you want to discount your prices by 2%. To keep your current margins, you’d have to get 7% more sales. That’s a lot of sales.
Discounting your prices, whether to keep up with competitors or to attract new customers, is usually a bad idea.
Don’t discount price—add value. Throw in other things to raise the perceived value of your offer.
6. Increase your prices
On the flip side, let’s see what increasing prices can do. Pretend your sales margins are currently 30%, and you increase your prices by 10%. You might worry about driving away customers, but let’s look at the math. To dip below your current margins, your sales would have to drop by 25%!
In the next post, we’ll look at ways of improving your cash flow.