I am often asked by small business owners “How do I increase my profits?’ I have to then ask a few questions of my own, to establish exactly what their main issue actually is.
On the surface it may seem simple – they are not happy with the level of profit they are making. This is a symptom of the real issues lurking further down in the business.
Take for instance a business, run by one operator, that is only turning over $2,000 in revenue a month, with overheads of $2,000 a month. The issue here may be that transaction volumes need to increase to lift revenue above break even. Does owner needs to generate more leads through marketing and convert them to customers? Perhaps the problem is capacity or productivity.
The operator may be extremely busy and cannot handle any more business! The business has hit a ceiling of being able to deliver more services or product. Has the owner designed a pricing model that allows for a decent profit to be made from his efforts? Is he paying too much for goods or materials (his costs). Has he worked out what a reasonable margin is for his product/service?
Then you have the situation where a business may have high revenues but a slim to non existent net profit margin. You have to look at overheads and cost of goods as well as the pricing to work out what the issues may be.
Improving your productivity (both the owners and any employees) through developing processes and systems can often deliver a profit where one did not exist before. You can make a start by putting in place simple measures of your existing performance.
Set up a basic spreadsheet with 3-7 indicators that you will monitor over a month. Usually these indicators (Key Performance Indicators) are financial measures, but don’t overlook the productivity based aspects of your business.The financials may be a symptom of a productivity issue.
A service provider may commence measuring their time spent delivering their most popular offering and find it takes, on average, 3 hours to complete. They charge $240 and their margin is 50%. They can only squeeze in two of these services a day.
What happens if they develop a process that allows them to deliver that service in two hours?
Not only can they deliver more of the services (perhaps 3 a day? – woohoo, productivity increase) they are being paid more for their time….might even make a profit!
What if they improved productivity, reduced costs, increased prices by 5% and asked for referrals? Revenue would increase as well as bottom line profit. Your lack of profit may just be a symptom of underlying issues. Once they are discovered and dealt with, huge opportunities to grow your business into a profitable and valuable asset present themselves.