Profit is a deceptively simple concept. Revenue minus expenses equals profit. Unfortunately, understanding the formula doesn’t also give you the ability to snap your fingers and improve profitability.
Every business owner has an incentive to find ways to increase profits and improve profit margins. Finding realistic and effective ways to do so isn’t always straightforward.
The basic suggestion for improving profits is usually something along the lines of “sell more” or “reduce overhead.” While both of those things could potentially improve profits, they also have the potential to do the opposite.
You can reduce your total expenses by cutting or eliminating your marketing budget, but that might also have a dramatically negative effect on your business’s revenue. Finding creative ways to do more with less is one of the most reliable ways to increase profit, and there are several potential avenues for accomplishing that goal.
Any business that relies on vendors for inventory, production or services has options. Maybe one of your existing vendor’s competitors offer better pricing. You might find a vendor that offers a better product or more efficient service that helps enable you to increase revenue. Going with the cheapest option isn’t always the best course of action, especially if it will have negative ramifications for quality or sales.
Things like payroll, utilities and supply costs are frequently contributors to overhead creep. Many businesses pay overtime that could be avoided by adopting staggered schedules or through the implementation of other staffing strategies.
There’s also no reason you can’t find ways to cut utility costs in your offices. How many offices in Phoenix are too cold or have ACs that run when no one is there? Many commercial HVAC systems are also just old and inefficient.
Also keep an eye out for wasteful costs in inventory, either from spoilage or slow-moving products that are taking up valuable resources and space. If you’re worried your inventory practices aren’t very efficient you should consider investigating alternative inventory management strategies.
Improving sales is rarely straightforward. One of the oldest, most tried-and-true methods is through marketing.
You’ve likely utilized several marketing strategies in the past to varying degrees of success. Some probably worked better than others. Businesses are always best served by investing heavily in those marketing strategies that develop the best, most conversion-prone leads at the lowest cost.
Maybe the easiest and most effective way to increase revenue is to focus on services and products with the highest profit margins. A good exercise is to organize your clients, services or products into four categories:
It’s best to just focus on the services in the two high profit categories. Look to upsell and grow your business in the low sales high profit categories while nurturing and safeguarding the high sales high profit opportunities.
There are really two obvious ways to raise revenue – increase sales and raise prices. The easiest of those two options is raising prices. How much you can raise prices depends on a lot of factors that are likely unique to your business. In any business with high sales volumes, even small price increases can sometimes have a dramatic effect on profitability and profit margins.
There are several potential problems with profit-increasing strategies. Many of those pitfalls can be avoided by keeping a close eye on your profit margin.
There are many scenarios where increasing your revenue could potentially result in a drop in profit margin, mainly when increasing sales or production requires higher-than-normal investments. If your profit margin is going in the wrong direction, you aren’t really making meaningful progress unless you can further reduce expenses while maintaining those revenue gains.
Reducing expenses could also result in a drop in revenue. You can cut a marketing budget, but it might also result in the loss of leads.
Many businesses benefit from thinking ahead. Branding efforts or improving quality assurance strategies may not seem like obvious drivers of profit, but reputational changes might win your businesses a larger share of the market.
Working with the right bookkeeper, accountant and business consultant is often the best way to find effective profit-improving strategies. The team at H&H Accounting Services in Phoenix is committed to providing not only reliable, money-saving payroll services but also thorough, valuable business consulting services.
Give us a call at (480) 561-5805 to request a free, no-obligation one-hour consultation. We’d be happy to visit your business and discuss how we can help.
