Building a profitable business isn’t all about making sales and chasing revenue.
Many business owners believe that to put more in their pockets, sales must be boosted substantially. But the focus needs to be shifted to more than just revenue.
Quick sales and high cash flow doesn’t always equal success. Revenue milestones only show you how your business is doing today, and very little about direction and whether its growth is sustainable long term.
But there are other ways to make more money – increase your profit margins over sales.
These are an essential health and performance indicator of a business and shows its ability to turn revenue into profits, after accounting for running expenses.
Looking to drive better business results?
Here’s how you can cut costs and boost profit margins in 2019.
Note: Before profit margins can be increased, they must be calculated to know what numbers you’re working with.
Review Supplier Contracts
Talk to business suppliers and negotiate a cheaper rate. Biannual reviews are a cost effective way to secure the right deal and confirm they’re aligned with your business. It’s also necessary to mitigate risks and encourage continuous improvement.
When reviewing, check:
- Supplier invoices for overcharging, such as missing discounts or double billing
- Performance efficiency and whether any supplier incidents have negatively impacted business
- Quality of supplier including customer service, knowledge, responsiveness, after hours service, delivery and maintenance arrangements
- Cost and billing, including payment terms and value for money. Find alternatives to high-priced suppliers or negotiate discounts and better payment terms
Engage an Insurance Broker
Along with regular supplier checks, business insurance contracts should also be reviewed.
If insurance costs are too high, try searching for a new, more cost-effective supplier. Many businesses could benefit from an insurance broker to determine if you’re paying too much and whether your business is adequately protected. Brokers also have more negotiating power and can help you understand industry jargon and complicated contracts.
Avoid Discounts by Improving Inventory Visibility
Heavy discounts are notorious profit-killers.
Where possible, avoid markdowns and improve the way inventory is handled instead. This maximises profit margins and helps you make better purchasing, sales and marketing decisions.
Inventory and products can be managed more efficiently by:
- Using streamlined systems/processes to understand inventory data
- Knowing what products are selling fast vs slow movers
- Tracking all product information
- Auditing inventory every 3-6 months
- Practicing the 80/20 rule
Increase Staff Productivity with Incentives
Employee motivation is critical to the success of any business.
Drive better results by increasing staff productivity through performance reviews. Recognition and reward systems go a long way in motivating staff to become high achievers. Incentives, bonus contributions and staff training for career development will help to build loyalty and performance.
Don’t Make Price a ‘Thing’
Competing on price isn’t the healthiest or most profitable way to differentiate your business from others.
Instead, focus on how you can create more value for your customers. This doesn’t mean you can’t increase your prices (a 10% increase is ideal for profit margins), just differentiate yourself in other ways. Emphasise why people should do business with you (value) vs price is more profitable long term.
Benchmark Key Financials
Benchmark financials against other similar businesses in your industry to see how yours measures up.
Benchmarking allows you to identify where costs can be reduced and to plan and prepare for business growth. When analysing, consider seasonal changes, key trends, challenges and predictions for your sector.