Increasing profits is often the biggest challenge for small businesses. Profit margins are fundamental to growth and success, and there are two primary ways to increase those margins: by reducing costs or increasing sales. However, focusing solely on generating more sales will not necessarily improve your bottom line. In fact, increasing profitability often depends on doing many small things, rather than making one big change.
As you focus on finalizing your plans for 2019, here are some strategies you can implement now to boost your small business bottom line in the New Year:
Evaluate your pricing.
Many small business owners do not charge enough for their goods and services. There are numerous reasons for this, such as failing to pass along increases when materials, production, or shipping costs go up. Service businesses often don’t charge for the actual number of hours it takes to complete a job, and many small businesses intentionally underprice goods in order to be more competitive. However, being the lowest-price provider in your marketplace can often backfire, resulting in lower profitability and preventing business growth.
It’s important to evaluate your pricing on a regular basis. Compare your prices to competitors. Be objective about the value you provide to your clients and customers, and do not hesitate to raise your prices if necessary. Consider making gradual increases in prices on a regular basis. Hitting your customers with significant increases could make them look elsewhere. A small price increase is not likely to have a negative effect on sales, but it could positively impact your profitability.
Lower your cost of goods.
Cutting your costs without cutting quality is a fundamental strategy for improving your bottom line. If you have been running a successful business for some time, there should be ample opportunity to work with vendors strategically to help manage your cost of goods. For instance, you can ask for a discount on what you buy based on the size and frequency of your orders or take advantage of early pay discounts. If your current vendors are resistant, interview different suppliers to see if you can get better prices or terms on the inventory or raw materials you buy. You could save a considerable amount of money by renegotiating your supply deals on a regular basis.
Analyze your overhead.
Small businesses often struggle under the weight of too much overhead, from carrying too many staff to paying too much for services. To save money and increase profitability, it pays to consistently look for ways to lower your fixed overhead. This requires close scrutiny of costs, contracts, and fees and making cuts wherever possible.
Start by eliminating non-strategic expenses that don’t add value to your business. Utilities, Internet, phone and equipment servicing costs are examples of expenses that should be reviewed and renegotiated on an ongoing basis. Consider speaking with your landlord about reducing your lease rate or extending your lease without an increase in rent. Evaluate your health insurance costs as well as fees for professional services like accounting and legal. Revisit what you’re paying for credit card acceptance to see if you can negotiate lower fees from your merchant card provider. Don’t forget to examine your payables and company credit card bills for expenses you can cut back on or eliminate.
Manage your inventory.
Whether it’s raw material or finished goods, inventory often represents the largest portion of a company’s current assets. How you manage it can greatly influence the cost of carrying your inventory as well as impact future profitability, cash flow, and the ability to pay vendor invoices and other bills. Unfortunately, poor inventory management is one of the primary ways small businesses waste money and erode profit margins.
Set optimal inventory levels and stick to them. Look for ways to safely reduce your levels of inventory or raw materials. Consider selling or writing off outdated stock to free up cash and shelf space. Investing in an inventory management software program can improve efficiency, reduce expenses, and help you monitor sales trends. While this may be an expensive proposition, the resulting savings in accuracy and time will offset the initial cost. Reducing the chances of inventory overages and outages will help ensure you have the goods on hand to meet customer demand.
Implement a formal lead follow-up process.
Despite the considerable investment small businesses make in generating leads, many fail to execute an effective follow-up process. If your sales team only pursues what they believe are “hot” leads, and even then only reaches out to them once or twice, you are wasting your investment and ignoring viable prospects who may not be ready to buy.
Resolve this problem and increase your profits by formalizing your lead follow-up process. Have a step-by-step plan for connecting with hot leads as well as keeping in touch with customers who don’t appear to be ready to make a purchase. Automate as much as possible so you can easily start the process for each new lead, and provide prospects with valuable information about your products and services to help convert them into paying customers.
Incentivize customers to buy more and more often.
When loyal customers increase the amount they spend with your business and/or the frequency of their purchases, your profits are likely to increase accordingly. While this may be stating the obvious, it is surprising how many small businesses overlook this simple strategy.
There are countless ways to encourage your customers to buy more of your products or services or to do so more often. Here are just a few:
- Cross-sell or up-sell. When a customer makes a purchase, suggest a complementary item or service (with a good profit margin) that will enhance the value of the original purchase. If you sell products online, add a function to the shopping cart that automatically suggests related products.
- Bundle products or services to increase the average price of each sale.
- Offer larger unit sizes. Sell your product in a bigger box or market your services in packages of 20- or 50-hours instead of 10.
- Give pricing or other incentives to make the purchase of larger unit sizes compelling.
- Promote limited time offers or coupons that must be redeemed within a specific timeframe.
- Create a loyalty program that rewards customers for frequent visits or purchases.
Connect with your customers.
Make a commitment to personally interact with your customers. Work a cash register or answer incoming customer calls. Ask questions to find out if they are satisfied with your company’s products and customer service. It’s important to get their feedback about what you could do differently and ways you can improve. Solicit suggestions for changes to your current services or products as well as additional items they might like to purchase. This information will go a long way towards helping you continue to grow your small business and your bottom line and enjoy a truly happy and prosperous New Year.
Working Capital Financing is a few clicks away.
Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.