Analyse your costs and gross profit
Business reports often lump all revenue into one account and don’t break it down into categories. Breaking down both the revenue and the costs associated with each revenue source enables you to see clearly where you’re making and losing money.
Understanding the costs of your products and services is also vital to working out your gross profit, which is the difference between revenue and costs, and is an important benchmark.
When calculating the costs of products you may need to include not just the product itself, but also the costs of importing, freight, packaging, labour, warehousing and raw materials. Costs of services may include labour, materials and out of pocket expenses.
If your gross profit is below expectations it may be necessary to assess how your products and services are costed and acquired. Can you negotiate a better price on packaging or other components, for example?
Review your selling price regularly
To improve profitability it’s vital to know the true costs of your products or services and keep an eye on them in order to avoid ‘margin squeeze’ (i.e. allowing costs to rise without increasing prices and absorbing extra cost).
Market forces have an impact on pricing but it’s not viable to continually absorb cost increases without applying price increases. And it’s not always necessary to increase the price of everything. For example, you may be able to restrict your price increases only to your best selling products. Alternatively, consider including a note in your contracts that your pricing will increase in line with the CPI. Regular small price increases usually incur much less resistance from customers than infrequent large increases.
Want more articles like this? Check out the financial management section.
Stick to a budget for your overheads
Overheads can get out of hand when there is no budgetary control. Busy small business owners often say that they don’t have time to keep an eye on what is being spent or to shop around for the best deal – but formulating a budget and sticking to it can save you plenty, and that means more profit in your pocket.
Spend your time wisely
Are you both the chief source of chargeable labour and the admin person in your business? If you’re turning down sales because you need time for admin, tally up the number of hours you’re currently spending doing non-profit generating activities and multiply that by your hourly charge out rate. You might find that employing someone else to do it (or outsourcing it to a fellow soloist) would cost you less than the income you’re missing out on by doing it yourself.
Keep on top of debt collection
Start with Terms of Trade so your customers understand how quickly you expect them to pay you. Invoice them as soon as the product or service has been delivered, or get a deposit or progress payments.
Follow up late payers smartly. Use email for small amounts and phone calls for large amounts. Keep good records of reasons or excuses for late payment and (if necessary) agree to outstanding amounts being paid off in instalments over a period. Make sure you know your legal avenues for chasing payment too.
Manage inventory and work in progress
Stock and jobs in progress can be a huge drain on cash flow. Think of stock as dollars piled up on the stock room floor and jobs in progress as dollars on the work room floor and you’ll soon see why it really pays to reduce the time stock sits in store and jobs wait to be finished and invoiced.
Good records and planning are vital to management of both. There are some cost effective online systems available that can save thousands of dollars in working capital requirement to fund stock and jobs. Examples are Unleashed online inventory Software and WorkflowMax job management software (both of which link to Xero online accounting software).
How closely do you keep on eye on your profitability? Any helpful tips or processes to share to improve profitability?