4 Ways to Increase Profitability for Small Businesses
Maintaining a high degree of profitability is a constant struggle you'll encounter throughout the life of your small business. To accomplish this, you'll need to evaluate your operating expenses extensively to find strategies that will boost revenue while keeping costs down. A few easy concepts can help you increase the bottom line of your small business.
Here are four effective strategies to reduce costs and improve profit:
1. Remove Unprofitable Services and Products
Products or services that generate the highest gross profit margin are the most essential for your small business.
Review your pricing regularly, identify the most profitable products and services, focus only on these, remove the unprofitable ones, or review them for improvement.
2. Reduce Your Overheads
You'll increase profits by reducing expenses. Examples of what you can do to cut costs include:
- Reviewing your vendors’ costs at least once per quarter
- Lower office space costs
- Don’t buy expensive tools if you can’t use them for their full potential
- Laying off staff
Laying off staff can be one of the most challenging aspects of running a business, but sometimes it's necessary.
To determine if it's necessary, calculate your employees' productivity ratio by adding their payroll and payroll-related expenses, dividing them by the number of sales they bring in. If the productivity ratio is larger than 100%, it may be good to cut back on staff members.
3. Find Your Best Customers
Apply the Pareto principle (often known as the 80/20 rule) to your business. In simple terms, around 80 percent of your profit is gained from 20 percent of your products or services. The same percentage of profit is often also gained from the same customers.
Focus on your most profitable customers.
4. Upsell and Cross-Sell
Increasing the order size of customers can be achieved through upselling or cross-selling your products and services. When a customer makes a purchase, suggest something that can enhance the original purchase's value.
For example, if you own a jewelry store, suggest a necklace or bracelet that matches the earrings the customer bought. If the customer doesn't show much interest, offer the additional product at a discounted price to urge the sale. Train your employees on these sales techniques to get order sizes increased.
If you own an online store, get a function added where it automatically suggests related products to the person shopping.
If you're unsure of the decisions that need to be made to increase profitability for your small business, consider hiring a part-time CFO to make things easier.
Understanding your small business's finances from an outside expert's point of view can help you make the right decisions and may even change the course of your company altogether!