Achieving success as a small business owner requires a proper focus on profitability. Of course you focus on profits, but are you being honest with yourself about the actual profitability of your company? It’s common for new businesses to endure a period of time operating at a loss, but it’s a mistake to think the money takes care of itself if you just keep going. Like nearly every aspect of your business’s operation, you can only maximize profitability if you carefully attend to it. This makes it very important to focus on profitability when you start out, when you might have limited resources and revenue. Understanding a company’s growth stages helps you learn how to increase business over time.
Many new small business owners make the mistake of focusing on revenue when they should pay greater attention to costs. You have much more direct control over your costs than over how much money you earn. It’s also much easier to accurately forecast costs than revenue.
First and foremost, it’s critical to have a good handle on the exact amount of your expenses. That means understanding specific costs, such as the per item production or wholesale cost for each of your products. When figuring costs, remember to count indirect expenses, including licensing fees, insurance, packaging, and shipping expenses. If you buy 10 wholesale items at $1 apiece, plus pay $10 shipping, you have an actual cost per item of $2, not $1. Other expenses, such as utilities and payroll, often remain quite similar throughout the weeks and months, making it easier to track expenses and forecast upcoming cash flow injections.
An operating margin serves as a good measure of business management, providing your profit margin after subtracting direct production and overhead costs such as salaries and office space. This profitability metric helps you evaluate the management efficiency of your company. Anywhere you can cut expenses and improve your operating margin amplifies the effect on your bottom line net profit margin. When you examine your profit margins, compare them to those of similar businesses to gauge your small business profits against your competitors. This both helps you understand the competition and learn how to build your small business budget.
Steps to Increasing Profitability
Analyze each expense in terms of productivity — its cost versus the extent to which it contributes to increased revenues. This makes it key to view every cost as an investment and then examine how much return that investment provides. For example, you might determine how adding an extra employee might pay off for you in business terms before hiring. This helps you see if that new hire might ultimately increase your revenue or profitability.
You might also continually review expenses for possible savings. For example, check with your bank to see if it might lower fees for your business accounts, or evaluate the possibility of renting equipment instead of purchasing it. You might also look for ways to cut utility bills by conserving energy and water. When you first start a new business, you can increase your profitability by doing things for yourself rather than hiring others, such as cleaning your office space.
It also helps to use monthly and weekly sales goals to focus on business profits by generating more business and increasing revenues. Setting goals helps to keep your business consistently moving forward and growing.
Consider the different revenue-generating aspects of your business, such as different product lines or even new vendors, and make sure you dedicate most of your time and resources to the most profitable areas of your business. If you have product lines that generate vastly more profits for you than others, then focus on the sale of these products rather than items with smaller returns.
By monitoring these and other crucial aspects of your business, your small business profitability becomes understandable. Further, through continued oversight, you can begin to emphasize your profitability and enhance your bottom line. Using an accounting system such as QuickBooks Online, you can generate a Profit and Loss statement automatically. Learn how today.