The first step towards improving profitability for most small business owners is improving financial literacy. As Marcus Lemonis of “The Profit” says, if you don’t know your numbers you don’t know your business. Specifically, when it comes to increasing the profit margins of a small to medium sized business, there are a number of things that a business can focus on.
Gross Profit Margins
Gross profit margin is important to any business because it provides a good estimation of the business’ health. In order to deal with anomalies within gross profit margin, a company needs to focus on some very specific points in its product timeline such as:
- Direct Costs – These costs can be further subdivided into product costs, labor costs (contractual and permanent), and incidental materials costs. A business may have one or more of these to deal with depending on the product.
- Target a Viable Gross Profit Margin Figure – This requires setting up the proper tools in order to quickly determine the profit potential of current and future customer contracts, how they can transfer into profitable projects when they get on-stream, as well as estimate the level of profit to be garnered from each and every sale along the way.
- Feedback and Analysis – This requires following up with a project after it goes on-stream to see if it approaches, meets, or exceeds the projected profit margins. If it falls too far short of the projected margins, analysis allows a company to see how the process or marketing can be improved.
Analysis of Top Sellers
Learning from the competition has a key role in increasing the profitability of a business. Mimicry has enabled many companies to see massive increases in their profit margins simply by studying what makes their competitors successful and following the same formula with their own personal twist. These individual twists can make for an even better product than the competitors. It does, however, require an intimate knowledge of the competitor’s products and services. Once this has been achieved, it simply takes an innovative mind to improve upon it in a unique way. This can lead to increased profitability through utilization of a competitor’s product template.
What really tends to bite into a company’s bottom line at the end of the day is the amount they spend on overhead expenses. Itemized, per project expense lists can help a company narrow down where they spend the most money and allows them to focus on reducing that money by coming up with innovative ways to perform the same task. Cutting unnecessary expenses can greatly increase the bottom line of a product line in cumulative profit. Before cutting an expense a company should ask these questions:
- Does cutting this expense affect the quality of our product or services?
- Will the customer have a different user experience if we cut this expense?
- Does cutting this expense keep with our core values for the product and our company?
- Does this expense represent any part of our internal company culture?
Improving the Bottom Line
The profitability of a company depends on the profitability of its products. That said, it should be noted that the most successful businesses are those that are able to balance their product quality with cutting expenses as much as possible while still delivering a quality product. It is not worth sacrificing the core values of a business or the user experience in order to achieve a bigger bottom line. This will only cause the overall brand to suffer in the long run. If you’re looking for online accounting services that are focused on improving your company’s bottom line, Virtual Bean Counters can help. Contact us today!