It’s National Hole in the Bucket Day. This got us thinking about the ways small businesses can leak profits. If you imagine your business is a bucket and the water inside is your profit, you probably spend plenty of time and energy on increasing sales in order to fill the bucket. However, business buckets often develop holes that allow profits to escape. In order to increase profitability, it’s important to identify these holes and find ways to plug them.
If your business is generating steady revenue but your profits aren’t meeting expectations, it’s time to examine your pricing, processes, purchasing, and other factors to pinpoint where your business may have sprung a leak. Here are some common areas to consider:
Prices are too low.
Many small business owners do not charge enough for their goods and services. There are numerous reasons for this, from intentionally under-pricing goods to be more competitive to failing to pass along increases when materials, production, or shipping costs go up. This is often an issue for service businesses that fail to charge for the actual number of hours it takes to complete a job.
It’s important to evaluate your pricing on a regular basis. Be objective in determining exactly what you’re selling and the value you provide to your clients and customers. Quantify it in dollars and cents. Compare your prices to competitors and raise yours accordingly. You may lose a few customers in the process, but remember that your business is not meant to be all things to all people. Also keep in mind that being the lowest-price provider in your marketplace can often backfire, resulting in lower profitability and preventing business growth.
Cost of goods is too high.
If you’re launching a new business, you may not be able to negotiate the best prices for the inventory, raw materials, or supplies you purchase. However, if you’re running an established operation, there should be ample opportunity to work with your vendors strategically to help manage your cost of goods.
You may be in a position to ask for a discount on what you buy based on the size and frequency of your orders. If a vendor offers quantity discounts, make sure you evaluate how fast you will be able to move the inventory and whether or not the savings is worth ordering in larger quantities. Taking advantage of early pay discounts will also provide additional income for your business.
Processes are outdated or inefficient.
Many business owners become stuck in traditional ways of doing things. This may be the result of inattention or an unwillingness to let go of old methods, even if they no longer work. Unfortunately, there may be a hidden cost in continuing to do things because you have always done them that way. In order to stem profit leaks, it is crucial to know how effective a process is and whether or not it adds value for your customers and your business.
Perform an overall audit of company processes to identify the weak spots. Look for both efficiencies and redundancies or inconsistencies that are preventing you from optimizing income or costing you potential sales. If a current process is not the most efficient way to accomplish your goals, focus on upgrading and simplifying it with the goal of making your company more productive. Employees who are on the front lines are often in the best position to observe leaky processes, so be sure to solicit their input.
Overpaying for services.
One common way that businesses waste money is by overpaying for services or continuing to pay for a service they no longer need. Business utilities, Internet, and telephone services are major examples of expenses that need to be reviewed and renegotiated on an ongoing basis.
However, these are just a few of the costs you may be able to reduce in order to increase your profits. Evaluate the fees you pay for professional services like accounting and legal as well as your equipment servicing costs. 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 scrutinize your payables and company credit card bills for expenses you can reduce or eliminate.
If there is more than one provider for a particular service that is important to your business, get price comparisons from other providers. Sometimes just threatening to switch providers will result in a better deal. Remember to choose your vendors wisely and track the level of service they provide. Poor-performing vendors can have a significant impact on your bottom line. Also, be wary of long-term contracts that lock you into utilizing one provider for an extended period of time.
The Association of Certified Fraud Examiners estimates that the typical business will lose an average of six percent of revenues from employee theft. Small businesses suffer disproportionate losses because of the limited resources they have to devote to detecting fraud.
The risk to your company can range from unintentional employee neglect to malicious intent to harm your business by taking merchandise, company documents, or proprietary information.
One way to address this is through employee education. Train your employees to be discreet with information, and make it clear that sharing it can put your business at risk. Ensure that everyone who works at your company understands that you have zero tolerance for employee theft.
It is also important to manage or avoid actions that can result in alienating your staff and establish and maintain a company culture where your employees feel valued and appreciated.
Remember that sales alone won’t increase profits; you also need to carefully manage expenses and finances to avoid hurting your bottom line. If you have a leaky bucket, it makes sense to make it watertight before you continue trying to fill it.
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.