Proven Strategies for Improving Profit Margins in Your Small Business
In a small business, profit margins are usually quite tight. You don’t have a lot of wiggle room between your expenses and income, and you need to continually focus on boosting your sales, keeping costs low and maximizing your profits. If you don’t, this could spell the end of your venture.
That’s why we’ve created this guide to improving your profit margins. By using these five simple strategies you can increase your revenue and scale up in a way that’s sustainable.
- Work On Increasing Your Turnaround Time
The longer you spend on a job or an order, the less money you make from it. It’s a simple equation.
The time spent taking a job from the initial contact through to payment is an expense to your business. If you’re taking too long to close jobs, you’re losing out on other orders or jobs that could also be bringing in money.
Take some time to go through your process from the initial contact with a lead or customer, all the way through to the final payment. If there are bottlenecks slowing down the process at any point, figure out how to open them up.
Maybe there are too many steps to go through for a client to place an order. Perhaps one person is taking too long to complete the necessary steps before an order can be finalized. Or, your departments aren’t communicating effectively. Whatever the bottleneck is, determine how you can open it up.
- Focus On Client Retention
The time, manpower and cost of bringing in a new client far outweigh anything spent on retaining an existing client. In fact, it can cost anywhere from 5 to 25x more to bring in new customers.
The first part of this strategy is to keep strong, open lines of communication with your customers. You need to be in the courting phase all the time. You can’t stop once they’ve placed an order because you want them to feel special throughout the entire process. This way, they’ll keep coming back whenever they need a new order.
The second part of this strategy is to go back over past clients and see what may have caused the drop-off in repeat orders. Look for common points across clients who didn’t return for another purchase and see if there is a way to improve that part of the process. You can even send out a survey to your customers and ask for direct input into how you can improve.
- Up-Sell and Cross-Sell to Existing Clients
On the topic of existing clients, up-selling and cross-selling are great strategies for improving your profit margins. When you can do this successfully, you’re essentially increasing how much income you make from one sale—using only slightly more resources to get a bigger order, producing a higher profit margin on that sale.
This strategy is all about looking at what you offer and working out how you can build packages or better offerings for clients. Maybe you have products that complement each other, and you can offer one for a slight discount when someone buys the other. Perhaps you offer a premium version or value-add ons to your general offering.
It’s important, however, that you don’t overdo the marketing on your up-selling. You don’t want customers to be put off if they aren’t interested in anything more than they originally asked for. You also don’t want them to feel like you’re only interested in them if you can get more money from them. It’s a balancing act.
- Take Stock of Your Expenses
Sometimes profit margins aren’t being reduced on the sales side of the business. It could be that your overheads and expenses are unnecessarily high and could be cut down to help your cash flow.
It’s important to regularly take stock of where your business is spending money and how it can be optimized. Something as simple as switching suppliers for your office cleaning products can make a massive difference to your bottom line.
Another area where businesses spend a lot of money is on subscriptions to software. Keep a close eye on that and see if there is a cheaper option available or if you’re using your licence to its maximum.
- Automate Whatever Processes You Can
Automation is a great way to improve your profit margins. Sure, you need to spend a bit of money to get those systems put in place and to get the technology required. However, once they’re all set up, you’ll start to see the benefits.
Automating ringing up sales and connecting that to inventory management, for example, can seriously help reduce the amount of time your employees spend on paperwork. This frees them up to focus more on the actual sales—and making more sales.
Get Familiar With Your Profit Margins
All of these strategies are great, but they don’t mean much unless you know how to calculate profit margin.
First, you get your basic operating profit margin. This is when you look at your income less your expenses and work out how much money you’ve made before you pay tax on it. This figure is expressed as a percentage.
Your second figure to look at is your gross profit margin. This looks at the hard costs—how much money you made on the sale (gross income) less how much money you spent on producing the product or service you sold. The expenses are the actual costs of the products used or sold, plus the hours spent on the job if you offer a service.
The money left over is how much you have to spend on marketing and other overheads not directly related to individual sales. With this figure, you can work out how much you have for these overheads if you still want to build a decent profit margin.
Keep Your Small Business Moving Forward
Profit margins might be tight for most small businesses. But that doesn’t mean you need to constantly struggle to make ends meet.
It’s all about planning, strategizing, and keeping a close eye on all of your operating systems. When you do this, you can turn greater profits and accelerate your small business’s growth.