Declining or flat-lining profits (or even profits that aren’t increasing as quickly as you’d like) could be a major red flag for a small business.
However, many business owners fall into the trap of doing the same things that worked in the past and hoping to achieve the same or better results – despite the evidence from what the numbers say.
It’s important to work out how to increase profits for a small business so that the numbers come back a little kinder next time.
With that in mind, here are five ways to help you become more profitable in the next twelve months.
How to increase profits for small business: 5 ways
1. Find out which customers really are profitable – you may be surprised!
There are some important questions to ask of your customers:
- How much profit do you make from each customer?
- When was the last time you looked at how much profit you make from each customer?
Every small business owner should easily be able to extract the direct costs of supplying goods to a customer. Modern accounting systems provide all the information you need to assess how much profit you’re making.
But few businesses actually do this.
Many continue with the belief that a big or ‘special’ customer is an important source of profit. In fact, it could well be the opposite! A big customer may be your least profitable – and the more you sell, the less profit you make. Unless you make some changes.
In service businesses, it can be even less clear how much profit you make from a sale, as many businesses do not record the costs of all their inputs or assign them against sales.
Service businesses can easily fall into the habit of adding extra ‘value’ for a customer without charging for it.
Instead, they absorb the cost of these extra items and suddenly the profit has vanished.
Be very clear about what is included in the service you provide and what’s not. When the client asks for extra, the fee needs to be increased.
Review how profitable each of your customers are and change the price or reduce the extras so that you do make a profit.
2. Be more consistent in delivery
The purpose of having a sales and delivery process that is documented, standardised and repeatable is to create efficiency: delivering the sales in the same way, at the same quality and for the same cost each time.
Why then would you regularly change the process?
For many businesses, the only consistent element of their delivery is that the sale is delivered in a different way each time for every customer!
When you do this, you increase the cost as well as the incidence of errors, mistakes and reworks, and you make less profit.
Implement a consistent process for delivery of sales and stick to it.
3. Review your pricing
When was the last time you increased your prices? Are you fearful that you will lose customers?
This fear holds back many business owners from increasing prices. Instead, they absorb price increases from suppliers and increasing wage demands.
When you absorb these increases, your profit falls.
Sure, you may lose some customers when you increase prices; but these are often the unprofitable customers, only after the cheap deal and not likely to contribute good profits to your business year after year.
4. Improve your marketing strategy
Why are your competitors increasing their market share at your expense? Because they are marketing the benefits of their products, ensuring repeat sales from existing customers and attracting new customers.
To be effective with your marketing, you will need to:
- Plan which customers you want
- Decide what you’re going to sell to them
- Work out how they will find out about new products
- Convince them why they need to buy from you
Slapping together a few AdWords and hoping the sales will pour in just won’t cut it.
Businesses that incorporate a well-defined marketing strategy into their whole business plan are more successful.
5. Evolve by introducing new products or services
Few companies can survive without changing and introducing new products over time. Those that don’t evolve either have a unique and durable product (think WD40) or they are no longer in existence.
Needs change. Technology changes. Customer demands will change.
What are you doing to meet these changing needs?
How are you going to create more profit in your small business?
The five ways to increase profits detailed above are quite simple. The hard part is making it happen.
Many businesses fail to progress because they don’t know where to make changes or how to start. So, they keep doing the same thing.
The best way to overcome this is to get advice from an experienced business adviser.
We help business owners create high-performing businesses by working on the focus, the plans, the actions and the implementation.
We keep you accountable and focused on the actions you need to take to create positive change so that your business continues to grow profitably.
We also offer a Client Advisory Board service – a great resource for every business. You get industry experts in your very own board of advisers, ready to help make your business a success. To learn more about this exciting service, download our Client Advisory Board guide.