Many small business owners struggle to understand and interpret the figures that drive income, profitability and cash flow in their business. There are two ways main ways to improve the bottom line in a business:
- Increase your sales (income)
- Reduce your business costs
You can increase sales and profitability in most businesses by increasing the number of customers, how often they buy and how much they spend each time they buy. To do this you need to understand –
- How many customers you have
- How many times a year they buy your product or service
- What your average sale value is
Looking at your customers – if it’s more customers you need, the things to focus on are lead generation, advertising/marketing and converting an enquiry to a sale. The other critical part is keeping your existing customers. If this is the problem then you need to look at your customer sales and support processes, including after sales service. To increase your average transaction value, you could look at such things as increasing your prices on non-price sensitive lines. Or introducing internal systems to upsell or cross sell additional products during the sale.
Increase Profit Margins
When you buy a product for say $50 and on-sell it to your customers for $100, you make a gross profit of $50 for each product that you sell. This profit provides you with the funds for your general business running expenses. When looking at your profit margins you would need to look at the following things.
- Do you have products or services which are not profitable?
- How does your pricing compare to your competitors?
- Are your margins being eroded by increasing product buy prices?
You should also look at your breakeven point. To do this work out how many units you have to sell before you break even. This means, what profit do you need to make to cover all of your costs involved in selling the product and the general running of the business. Products or services which are above this amount are profitable. Another way to improve your profitability is to reduce your day to day cost. Do you have the best phone plan/system, is your marketing targeted and not too highly priced etc. Most business would be able to cut some costs without having a negative impact on their business and these savings immediately improve your profitability.
Cash flow If your customers are taking too long to pay you, you will be making the sales but not collecting the cash. When this happens your bank account wont reflect what your profit is saying. The most common impacts on cash flow in a small business is the length of time on average it takes a customer to pay you, and how long and how much stock you are holding. Both of these things are tying up your cash.
If you need assistance with this seek the advice of a professional Bookkeeper or Accountant.