On the other end of the spectrum, Angry Birds pulled in a whopping $71 million in profits for 2012. So why is one bird so much smarter than the other?
I do find if funny that so many small businesses in America are far more profitable than Twitter. In fact, if you broke-even this year, you could tell your buddies at the networking event that you were $69 million more profitable than Twitter in 2013!
It's obvious that you don't need a ton of cash, huge operations and a Harvard built management team to make money in business. In fact, here are 12 steps to help you make quick changes to your bottom line.
12 Tips to Improve Your Company's Profits
Simply stated, profit is the financial gain of a firm after subtracting expenses from revenues. Generating a profit is critical to the survival of your company. Even more important is the ability to grow your business in the future.
Profit is not the same as cash in the bank at the end of the year. Too often, business owners think they know what their company is making by what’s left over in the bank after paying expenses. That is a recipe for financial disaster. Profit is measured on paper through a properly structured and maintained accounting system. In most cases, this can only be done though a professional accountant, either in-house or an outside firm.
In order to be more profitable, you need to have a basic understanding of accounting concepts and be able to read financial statements. These concepts include gross profit margin, fixed and variable costs, operating expenses, assets, liabilities, and so on. Once you understand these concepts, you can then begin to set goals for future profitability.
Learning these things is beyond the scope of this article, but for now, memorize this formula:
Net Profit = Sales - Cost of Goods Sold - Operating Expenses
In addition, the concept of profit drivers will impact your bottom line. These can be broken down into two categories: (1) financial profit drivers such as pricing, fixed costs, variable costs, sales volume, financing costs, etc. and (2) non-financial profit drivers (productivity, client satisfaction, product or service quality, employee training, etc.
You should be able to identify and measure your key profit drivers and develop strategies to improve them. You should also know how to prioritize which of these drivers are most important or most in need of improvement in your business.
Using our net profit formula, let’s break it down by increasing sales and reducing expenses:
How to Increase Your Sales:
- Increase staff productivity – If you are not rewarding employees, you need to start now. You can do this through employee performance reviews and by teaching them sales skills. Everyone in the firm should be promoting your business, not just the sales staff. Reward them for a job well done and for bringing in new business.
- Find new customers – This is the lifeblood of any business. Customers drop off for a variety of reasons and need to be constantly replaced. Increasing the customer base will increase revenues which will grow your business.
- Find new markets – Can you expand your business into new areas related to your industry? Do some market research and look at what your competitors are doing in this area.
- Develop a new product line – Survey your customers and ask them about new products that they need and you can easily provide.
- Improve customer service – This is one area that is very important and can be implemented immediately. There is a book by Ken Blanchard and Sheldon Bowles entitled Raving Fans. Get it and read it. It’s short and can be read in a day, but you will learn what great customer service is all about.
- Increase your prices – Consider this if you are not pricing your goods and services correctly and if increasing prices will not adversely affect sales. This should be done in small amounts at least once a year rather than a large price increase every five years. Customers are used to increasing prices and will hardly notice if done in small increments.
- Decrease your prices – Consider different kinds of promotions and discounts on a temporary basis to increase your customer base.
How to Decrease Your Expenses
- Decrease direct costs – Review all of your vendors’ prices and either negotiate a price reduction or find new vendors who will charge a lower price to get your business.
- Decrease indirect costs – Eliminate waste and errors through properly training of staff.
- Control inventory levels – If you carry inventory you can reduce the level of each product on hand and streamline your business processes. Most accounting software has the ability to set the correct quantity of products on hand and set reorder points.
- Decrease overhead – Consider ways to reduce the cost of overhead items. For example, you can save energy by turning off equipment and lights when not needed, reducing paper by implementing a paperless record keeping system, using email for communications, and invoicing customers instead of printing and mailing these items. The list goes on and on, but you get the idea. Small changes in different cost centers will add up over time.
- Benchmark key financial indicators – How do your financial statements and ratios compare to other companies in your industry? One free resource to check out is http://www.bizstats.com/. You may be paying too much for certain things compared to others in your industry.
The most important thing to remember is to prioritize which of the above strategies will have the greatest impact on profitability for your business. Some of these strategies will have an immediate effect and some will take time. But all of them can be implemented now. Also, within each strategy, focus on what will have the greatest impact on profits. For example, when coming up with strategies for increasing sales, focus on the more profitable items first.
One aspect that cannot be overemphasized is having an accounting and reporting system that will be useful for managing your business. It’s the most important thing because you will not be able to implement any of the above strategies without correct and timely financial statements. Consider hiring a properly trained accountant or outsourcing your accounting to a professional services firm.
Hopefully, using the strategies above will help you to rethink aspects of your business that will have significant impact on the profitability of your company.
This article was written by Gerry Meloni, a CPA and Ignite Spot franchise owner. To learn more about the services that he provides, call him at 210-298-4797 or click to visit his website.