To build a more profitable business, take practical steps to fine-tune your operation by focusing on driving profit throughout your business.
The following article, including editable checklist, is available to download as a PDF here: Coast Capital Managing Margins and Improving Profit Checklist.
Increase prices
A small increase in price without any fall in sales, or increase in your overhead, adds up over time. If a client is routinely late with payments, then it makes
sense to call them and ask why. It may be due to a misprinted payment date on their invoice, financial issues, or even customer disputes. Whatever the reason, the only way this problem can be resolved is by first discovering the issue. Small businesses may only sometimes charge what things are worth. Evaluate regularly whether prices can be increased by checking your costs and what competitors are charging. If you don’t keep up with inflation, you’re going backwards.
Decrease stock levels
Reducing stock levels can transfer cash directly to your bottom line. You can reduce the stock and raw materials you hold by making better use of online ordering and more efficient warehousing software so that you stock only what you need for the immediate future.
By holding a stock review every few months, you can eliminate any redundant products and slow sellers. You may also be able to buy stock from suppliers just a few days before you need it. The money saved can then go straight into the bank. You can sometimes receive large discounts by buying stock or materials in bulk, but always weigh this against the fact that this cash is then not available for anything else. This is especially critical when times are tough, and you need cash for working capital.
Collect on debts
Contact the customers who owe you money. Many small businesses feel uneasy about asking their best customers for overdue payments as they fear being pushy might send the
customer elsewhere. But they do owe you money – money that could be spent on growing your business or getting you through a tough patch. Develop a firm but fair collection policy. Customers need to know you will consistently follow up on overdue bills. Good accounting systems are essential because they enable you to quickly generate
overdue payment reports or flag them automatically for your immediate attention. Also, offering alternative payment options, such as taking credit cards, or accepting electronic payments can sometimes help you collect faster.
Send your invoices out faster
Consider delegating a responsible person to handle all the invoicing. This cuts down on the chances of misunderstandings or forgotten invoices. Any bills should be sent out as early as possible, regardless of the due date. A client is more likely to pay you earlier if they receive the bill promptly.
Check communication costs
Review your communication costs now and see how you might save money. Two recurring costs for businesses are phone and internet costs. Check regularly to see you’re getting the best deal you can. Don’t hesitate to change to a cheaper supplier, but ensure the quality and service are equivalent to what you’re receiving now.
Credit terms
If you offer credit, have payment terms clearly indicated on invoices and other correspondence. Likewise, when negotiating a new contract, remember to include payment terms so your new customer is aware of your expectations from day one.
Use technology
Make and receive payments electronically, saving you time and money, and avoiding invoices getting lost or misplaced.
Check cash daily
Make a record of how much cash is spent daily and ensure that you are satisfied with the reasons for spending. It will be much easier for you to identify improvements and learn where your cash is going.
Trim costs
Reducing costs can be a fast and effective way of increasing profitability. Look carefully at your expenses to see what items you can reduce or eliminate. Even small changes will add up to significant amounts over time.
Offer incentives for early payment
Encourage early payment by offering some form of value to your clients. This could be a discount on follow-up orders, or a small service offered free of charge. However, ensure these incentives are feasible, especially where free services are concerned.
Sell unused assets
Do you have equipment that’s underused? If you use an asset only a few times a month or year, it could be a better option to rent or lease similar equipment when you need it. Many businesses have assets that, if sold, create cash that may be better used as working capital to grow the business.
Improve your cash cycle
A shorter cash cycle can make it easier to manage your money so consider ways to get paid quicker. For example, some customers may be willing to pay a deposit or full payment in advance.
Check you have the right products
Whether your business focuses on one primary product group or sells a variety of products based on a theme, it’s important to make sure what you’re selling is still relevant to the market. Use your product sales data to review your range and determine which of your products are the most popular. Consider if you need to retire products and services with falling sales and promote the delivery of those with future opportunity.
Review suppliers
Identify new suppliers who can offer new products. Explore importing products direct or building relationships with wholesalers to identify new products you could be
offering your customers.
Stay on top of competitors
Watch your competition closely to check they haven’t launched new products or found exclusive new suppliers you can’t match. If they seem to generate more sales than you, determine why. What are they doing that’s enticing your customers away and how can you address this?
Finally, complete a competitor analysis to understand what they are doing well and what you could do to offset these actions.
Sell online
If you do sell online, invest in a responsive/mobile website, a great end-to-end user experience and have a planned online campaign to generate awareness. Businesses are increasingly going online to widen their distribution channel and to target new markets. Even if you can’t match overseas online prices, target those customers that will pay a
premium. Customers often prefer buying online from a local bricks and mortar business, especially with products that require guarantees or servicing.
Keep an eye out for new markets
If your business is doing well in your current location, research the market in a different region. Document what makes your business work, then target similar areas with similar customers.
Target your advertising
Advertising works best if you know your target customers, rather than a mass approach. Determine who your ideal customer is, and what their needs are. Then make sure what you offer matches.
Review seasonal trends
Review seasonal issues that could affect your business, like school terms, the weather and national holidays. Coordinate your promotion and product purchases with events
that are planned during the year. Develop a calendar that captures any excuse to get in front of customers, from sports events, local celebrations to national holidays.
Ensure systems are efficient
If you’re purchasing a wide range of different products, it’s important that your system is effective, efficient and easily understood by your employees so you can manage your cashflow and stock levels.
Use inventory software
All businesses should automate what’s being sold to measure inventory levels and what they have left in stock. It will allow you to use ‘just in time’ ordering to keep your inventory to a minimum without running out.
Offer your customers more ways to pay
Customers appreciate being offered options on ways to pay. Online and mobile payments mean you aren’t spending time invoicing and chasing late payers.
Reduce fraud and theft
Train staff on what to watch out for concerning fraud and theft. Security is a balance between a great customer experience and reducing the chance of having a product stolen.
Use accounting software A good accounting system is crucial. With it you can monitor cashflow, transactions and inventory, develop a customer database, and keep up to date with your bills and payroll. In addition, cloud based accounting system offers increased security, as well as being able to check all your financial data in real time.
Review sales volume
If your business has queues outside the door and you can’t keep up and customers are turning away, you need to find a solution. Larger premises, more staff, longer opening hours, or mobile payments are all options.
Recalculate your break-even point
Being busy but not making a profit hints it’s time to review break even. Run some scenarios, for instance, if you lower your overhead, raise prices, and focus on selling higher margin products, you may find you need to sell less to make the same money.
Compare sales against forecasts
Ensure your forecasts are on track, to continue to predict sales and make decisions based on accurate data. If your sales forecasts are inaccurate, it’s time to review how you predict sales and costs so they’re more realistic.
Check costs are within budget
Keep an eye on fixed costs to make sure that they’re not going over budget. Review your overhead – rent, power, internet, etc. – and if they’re more than you expect, look at ways to reduce. Match or exceed industry gross margins Every industry tends to have standard margins. If you’re below industry norms, it’s time to look at ways you can increase
your margins. Increasing price, targeting less price-sensitive customers, widening your product range to cover better margin products will all help.
Increase sales
A straight sales increase should improve profit if there is no discounting. To improve your sales, it’s not only looking for new markets and distribution channels but also:
- Forming strategic alliances with complementary businesses or a joint venture to tackle work you don’t have the resources for on your own.
- Actively selling to customers in your database who are inactive, or have bought recently and it’s time for a renewal or reminder.
- Spending time on getting existing customers to come back with targeted offers.
- Adding value by providing a premium product or service.
- Extending your product range or work to ensure it stays ahead of your competition.
- Focus your efforts on your most profitable customers, such as those who place large or frequent orders, pay their bills on time and are low maintenance.
Manage your customer cycle
Use the rule of 80/20: The 80/20 rule outlines that 80% of your profits comes from 20% of your goods or services. So make sure they are the high margin products.
Review your overall product and service mix and manage them based on where they are in your business lifecycle, for example, products or services with:
- High percentage of sales and high profit margins should be the key focus. Promote these, make sure you can deliver, guard against the competition and monitor any Key Performance Indicators (KPI’s) set up to inform you when sales could be slipping.
- High percentage of sales but low profit margins are problematic. You’re busy, but not making much profit. Here, look at a price increase or examine how you can cut costs to increase your profit margin per product.
- Low percentage of sales but high profit margins have potential but are not getting the attention they deserve. Maybe it’s time to dust off these items and promote them
- Low percentage of sales and low profit margins should be your bottom priority. So much so, that maybe it’s time to let these items go and delete them from your product or service mix.
Talk to your Coast Capital Business Advisor about credit facilities to act on this strategy.
