Profitability is paramount when running a small company. Businesses that aren’t profitable cannot stay in business without a steady influx of money from a reliable source. Burning cash continuously is not a good way to run a business. Cash burn might appear to be working for some businesses, but it will catch up with them eventually.
Small business profitability in numbers
A study by a bank found that cash flow problems were the cause of 82 percent failures. It’s not hard to understand why. Only 40% of small business make money, while 30% lose money continuously. The remaining 30% break even and are not making a profit.
Businesses that aren’t making a profit may be able to find a way to change their fortunes. It may appear that the only way to boost profits is by raising prices.
Apple Profitable lessons from the company’s
It’s a great idea to examine other successful businesses before discussing strategies for increasing small business profitability. You can see how they increased their profit margins. Apple is perhaps the best example of a profitable business.
Apple made the crucial move of increasing ARPU through the sale of more expensive models. Apple’s iPhone X, its first $1,000 model, saw profits increase by 40 percent in the year following its release, thanks to an increased average selling price.
Strategies to boost small business profitability
For newer businesses that have not yet built up a good reputation, increasing prices isn’t the best way to increase profitability. If prices are lower than those of the competition, it may be necessary to increase them.
Nine other ways to boost small business profitability.
1. Find more customers
Finding more customers is the obvious alternative to raising prices to increase profitability for small businesses. This can be done by business owners through various marketing channels.
Advertising can be in the form of TV, radio, print, or digital. Information marketing is also an option. Information marketing includes the publication of articles online that target keywords related to your business.
2. Market to more leads
Marketing and advertising is only one part of the process to get new customers. Other steps include collecting contact details and reaching out prospective customers.
Most small business owners do not spend enough time following up on leads. This can be a major waste of time for any business.
After the fifth contact, half of sales are made.
Leads are expensive to obtain, so it is a waste of marketing dollars not to follow up.
3. Order size can be increased
You can convince customers who are already spending money in your business to spend more. Current customers are a great source of new business.
Cross-promotion of other products and services is a great way to increase the average ticket size. Another way to increase ticket sizes is by upselling more expensive services or products.
Explain to the customer why they might choose the more expensive model and how this will benefit them.
4. Add new products and services
It is easy to attract new customers by offering products or services adjacent to those that the business sells. Asking current customers about the products and services they want to see can help business owners determine where they will get the best return on their investment.
Before launching any new service or product, it’s important to do some research on the market. When adding new services or products, it’s important to consider the margins that they offer. Services with higher margins offer substantial profits while having lower overhead.
5. Cut expenses
Net margins are the most important in determining profitability. As the owner of the business spends less money on the operation, the net margin will increase.
You can reduce expenses by switching to a cheaper supplier, spending less money on supplies, or cutting staff or hours. It can be difficult to lay off employees, but sometimes it is necessary.
To calculate the productivity ratio, business owners must add their total payroll expenses and divide that by the sales. If your productivity ratio is higher than 100 percent it might be time to consider staff reductions.
6. Line items can provide more information.
You may not know where to cut costs, so you need to look at the line items in the budget, each product and service, as well as the costs involved with selling them. Examining each product or service individually will allow business owners to identify those that are not profitable.
The budget allows business owners to know exactly where they are spending their money and what it costs them to run each section of their business. Some parts of the business may be less profitable than others.
7. More with Less
Owners of businesses should also take into account how efficient their business is. It’s important to consider the costs associated with each service or product, as well as which ones generate the most revenue.
Spending more money on areas that generate more revenue makes sense. Businesses may want to cut products and services that cost a lot to maintain, but do not generate much revenue.
If you cut any products or services, they can be replaced by others that will generate significant revenue while requiring less resources and capital. When possible, the focus should be placed on products and services with high margins.
8. Check inventory levels
Stocking products can cost money. This means that inventory storage is a hidden expense. It’s not worth it for businesses to spend money on items they never sell. This is why it’s so important to constantly monitor inventory levels.
Inventory management software is a great way to keep track of what items are selling. Software makes it simple to keep in stock products that are selling well and get rid of those that don’t.
9. Find ways to maximize your return on investment
How much money is spent on marketing to increase sales? There are many marketing methods, but they don’t all work for every business.
Businesses should review their marketing methods to determine which ones are most effective. You may want to consider eliminating one or more marketing channels to concentrate on those that provide the best ROI.
Even when the business is doing well, it’s important to perform regular audits. By staying on top of the financial status of their business, owners can head off any issues that could put them out of business.