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Manage For Profit

Managing a business for profit requires continuous reinvention and a watchful eye for signs of decline.

Congratulations, you survived the roller coaster of the building and growing your business. It’s important to continue with a growth mindset, however, today’s business environment requires constant reinvention to stay competitive. As you enter the Manage for Profit or maturity stage of your business life cycle, cash flow and profitability create a solid foundation. From a track record of annual growth to loyal employees and predictable revenue, this is the time to acquire other businesses, introduce new product lines, or consider selling the company to investors. Here you’ll find articles, guides and tools to help you avoid complacency in your success and stay vigilant for other opportunities or signs of trouble.

How to improve your profit margin

Matt Whetstone

By Matt Whetstone

Matt Whetstone leads First Bank’s business team. He leverages his lending expertise and understanding of business operations to make great things happen for First Bank clients in Southeastern Illinois and Southwestern Indiana. His team is focused on building relationships, helping clients manage risk and keeping businesses in our communities profitable and thriving.

Often times business owners become laser-focused on increasing sales to the point that they sacrifice margin or make other concessions in order to hit a growth target or pass a topline revenue milestone. While growing your business is important, you can't lose sight of how this sales growth impacts your profits – for good or for bad. Many business owners find that while they have achieved the sales growth they were seeking, their bottom line remained unchanged.

By focusing on improving your margins, you can see that growing your business can be achieved by growing profits rather than sales – especially if there is limited opportunity to increase sales.

First, increase prices

Often increases in prices by a very small percentage (even 1- 5%) on regular occasions is easier to implement, than hitting your customers with a larger price increase once a year.

Price sensitivity

If you have a price sensitive customer (they will possibly switch providers with even a small price increase) then consider the impact of losing them as a customer versus the increase profit you'll make from your remaining customer base. It could be you end up doing less work for the same profit (which is still an improvement).

There will always be a threshold where customers will switch for a lower price regardless of how great your business is – especially for products and services where customers have a fair idea of the cost.

If you do sell items where are customers are more price conscious, keep your major products or services at competitive prices. Instead, think about increasing margins on supplementary products or services where customers are either not so familiar with the price, or are less likely to compare you with the competition.

Second, lower the cost of supply

The other main way you can improve your margins is by lowering the cost of supply, finding ways to pay less for any of the costs associated with bringing your products or services to consumers.

To achieve lower costs, consider:

  • Sourcing raw materials from a less expensive supplier, if they offer the same quality. It's easy to fall into a routine and always order from the same supplier. Consider every year (or two) to re-evaluate the market or seek new quotes from suppliers.
  • Purchasing in bulk if discounts are available, you have the storage space, and you don't stock perishables.
  • Ensuring you take advantage of any early payment or cash payment discounts.
  • Taking steps to reduce theft and waste – make sure your inventory system is efficient and provides check and balances to monitor against fraud.

Third, focus on larger margins

Concentrate on the products or services you sell that have the biggest margins – by selling more of these items, your business will gain more profit. Train your employees to be aware of which items have the best margin and are therefore best to sell.

Likewise, begin to phase out goods that have low margins. If you're selling plenty of them yielding little profit, it might be best to use that space or time for something more profitable.

Other options for focusing on larger margins include:

  • Changing your product or service mix and to expand into other high margin areas that complement your existing offerings.
  • Promoting items with the highest margins above those that have low margins.
  • Creatively incentivizing your sales team with bonuses or other perks for greater sales of high margin items.

Remember the 80/20 rule outlines that 80% of your profits comes from 20% of your goods or services. Make sure they are the high margin products.

Finally, try these ideas

Target better clients

Change the customers you are targeting to ones who will spend more money, or who are less price resistant. They may be quite happy to pay a higher price for what you offer. Focus on the value that you bring to the customer beyond price.

Consider only doing business with those customers that pay on time, or in cash, or don't always want a discount. By not having to wait for your money you will enjoy higher margins by either paying less interest on any financing or receiving interest on spare cash.

Are there any clients that cost less to service (such as closer to your location, or don't require on-going support)? Having more of these customers will lower your overall costs, and therefore increase your margins.

Attract new clients

Consider the geographic footprint you currently serve and what opportunities you have both within that existing footprint and beyond. Are there clients in certain markets willing to pay a higher price than other areas? Do you face greater competition in certain markets? If you focus on local consumers who are price sensitive, can you find commercial or government customers who may be prepared to pay more for what you do?

Use the power of social media and online presence to attract more customers. Use CRM software to help track leads and be more efficient in gaining new customers. Finally optimise your marketing budget and track campaign performance with tools like Google Analytics, Facebook, LinkedIn, or Twitter.

Encourage customers to buy more – and to buy more frequently

If your loyal customers increase the amount they spend at your business and the frequency of their visits, your profits will increase accordingly. Encourage your customers to spend more by:

  • Stocking a wider range of products (with decent profit margins) and introducing complementary services.
  • Setting up a loyalty program that rewards them for frequent visits.
  • Up selling and cross selling.

Review how you work

Some businesses are able to reduce their fixed overheads such as salaried staff, with part-time or contracted workers. In addition:

  • Assess if any staff can work from home, possibly lowering any lease costs as you'd need less room to operate.
  • It could be possible to sub-contract any non-essential manufacturing to other businesses, which could save you the cost of holding the necessary equipment and raw materials.
  • The world is increasingly a global market place. What else can you source cheaper than your current supplier. This could be service tasks such as accounting services, subscriptions, and training.

Make your processes more efficient

Look at all your business's processes and brainstorm ways of making them more efficient in order to save money. You could, for example:

  • Cut your raw material costs by reducing waste.
  • Increase production line productivity by introducing lean manufacturing techniques.
  • Reduce the amount of money spent on stock by implementing just-in-time ordering.

Summary

Getting higher margins removes some pressure from sales because it means you can sell fewer products and services, or the same amount, and return a higher profit. Get in the habit of reviewing your margins regularly to make sure they haven't changed due to creeping input costs or sales discounts. Repeat these strategies often to keep enjoying healthy margins in your business.

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