If you run a small business it’s natural to think that increasing your sales will automatically generate more income for yourself.
But getting more customers doesn’t always lead to healthier profits as some business owners find out to their cost.
The good news is that there are some simple steps that you can take to maximise your profits without having to find new customers.
Firstly, look at how you can maximise your gross profit. You can do this in a number of ways, but start with pricing. When working out your selling price, have you ensured that you have included all the costs involved? So if, for example, you make loaves of bread don’t just include the cost of the ingredients – make sure you also include the time it takes people to make them as well as the cost of running the ovens.
And don’t forget less obvious costs such as postage or import duties if you buy in materials from overseas.
Make sure you do some research and find out what your “ideal” customers are prepared to pay and check out what your competitors are charging. Pitch your price to ensure that your mark-up on products is big enough to cover all your overheads and salary but doesn’t turn off your customers.
It’s ok to be more expensive than your competitors. If you make luxury items like artisan bread for example, you may want to charge more. In such cases you would need to promote your products as higher quality to justify the higher prices.
Understanding what margin each product achieves may help to eliminate wasted resource. If a product has a low margin and sales, you may want to focus on more popular items with higher profits.
Map out your sales and margin for each product you sell. If you have a product or service with low sales and high margins, you could consider boosting sales with a promotion.
And if a product generates high sales but has a low margin, consider increasing your prices. You might lose a couple of customers in the process but you will have a healthier margin.
Many business owners are confused by the difference between margin and mark-up and this can affect your profits as well. The terms are often used interchangeably, but they’re not the same.
Using a bakery example again, say you make a loaf of bread for 80p and decide to sell it for £1. Your gross margin – which is the difference between price and cost divided by price – would be 20 per cent.
But your mark-up – which is the amount you add to the cost to reach a price – would be 25 per cent. Too many business owners find this out the hard way when they discover they haven’t done as well as they thought.
As well as looking at pricing, you can also maximise your profits by managing your direct costs such as labour, materials and stock more effectively.
Your may be tempted to buy in more bags of ingredients, for example, to get a better price.
But if you’re left with too much stock on your shelves that you can’t sell, you may have to throw some products away. So it’s getting the balance right between making too much and not enough. Money tied up in unused stock means less money for the business!
Managing your overheads properly is also key if you want to generate healthy profits. That means understanding your current spending behaviour and getting rid of things you don’t need. Do you really have to employ a virtual PA, for example, or rent a large office?
It’s a good idea to set a budget for spending and keep within it. Consider drawing up an expenses policy for you and your staff to follow as well. You may be surprised by how much you can save.
Following these simple steps can help you increase your gross profit and reduce your overheads. You may then have more cash in your pocket to spend or more money to reinvest in your business.
Sue Marchant is the director of the Cool Ventures. As well as advising established businesses, she also delivers our Strategy & Business Planning and Finance Essentials workshops.
If you would like to learn more about managing your company’s finances, sign up for our Finance Essentials workshops or get in touch to arrange a 121 meeting.