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Improving Profitability


Making More Money


It is likely that for the first year of operations your business will not be making much profit. In fact, you might not be making any profit at all! If you started your business (as opposed to buying an existing one), you will be facing the task of building up a customer base and generating sales revenue while trying to cover the basic costs of operating.

However, understanding your costs and how to manage them will save you money down the road and give you a clearer picture of your business’s long-term viability. If the profit for the foreseeable future is less than what it will cost to run your business, your current business strategy is not viable. You must either cut costs, look for ways to increase revenue, or both.

One way to improve profitability is to focusing on your pricing. Here we will focus on reducing costs. Supplies are a major cost for most businesses. Being smarter about supplies and suppliers can help improve both profitability and cashflows.


Inventory


Depending on what type of business you have, your business may have a large amount of money tied up in inventory. This money is therefore not available for other uses. You should therefore be careful about the amount of inventory you keep and what you purchase. Poor inventory management can have a severe effect on profitability.
  • If you order goods you cannot sell, you might be forced to write-off goods. This means increasing your costs without increasing revenues.

  • If you buy more goods than you need, again, you might be forced to write them off. Alternatively, you may need to sell them at a large discount (and perhaps at a loss).
If you order too much, you will also have to find somewhere to keep the excess stock while you try to sell it. Space is limited, and if you are paying for storage, this adds even more to costs while providing no increase in revenues. In addition, stored stock can spoil or become damaged, which can cause additional losses.

Also consider that if you order too much of one type of product, or order stock that does not sell well, you are restricting your ability to buy other stock which will sell. This means you are missing out on sales revenues and, once again, reducing your profits.
 
Tips
  • Work out the profit margins on each of your products. Try to avoid stocking products which have a low margin, unless the sales volumes more than make up for the low profit per sale.

  • Use your past sales data, along with your sales goals to guide you in how much stock your order. If you are expecting your business to grow by about 15% from the previous year, try not to order much more than 15% more stock than last year’s sales.

  • Set a limit on the quantity of stock you will purchase before meeting with suppliers. This is especially important if your business is in the fashion industry or your suppliers frequently have new and interesting stock. This will help overcome the temptation to buy everything which looks new and exciting.

  • Analyse past sales data to work out which stock moves slowly and then, where possible, avoid ordering these items.


Supplier Relationship Management (SRM)


How you treat your suppliers is vital to the success of your business. Your inventory management depends, in part, on the relationship with your suppliers.

A good relationship with suppliers can have a positive impact on profits for several reasons:
  • It can make it easier to get supplies when you need them, thus increasing the sales (and profits) you make.

  • It may result in being offered better prices on your purchases, thus increasing your profit margin.

  • It may mean you are offered favourable payment terms – this may be a free source of credit.

  • Suppliers may reduce your minimum order quantities, and therefore allow you to keep less stock on hand.

  • Suppliers may be willing to distribute products direct to your customers, thus avoiding the need to keep much stock on hand and reducing your freight costs.
An ideal situation is where you have little or no stock on hand, and only pay for stock when customers order it. It is more possible to achieve this with online businesses as customers do not come to a physical store where they expect to see stock on shelves. If you have a good relationship with suppliers, you can be confident that they will have the goods you need in stock in order to be able to fill customer sales as they are made.

Good Supplier Relationship Management (SRM) practices are essential to the health of your business. You and your suppliers are essentially business partners – you rely on them for stock or supplies, and they rely on you for income. However, unlike a normal business-customer relationship you and your suppliers have a more ongoing partnership. Clear and timely communication with your suppliers is therefore vital. Also make the effort to send them (for example) Christmas cards and take other opportunities to thank them for their service.


Choosing Suppliers


Although price is important, it is only one factor to consider when choosing a supplier. You also need your suppliers to be reliable, stable, and to provide high-quality products on time. Even if you find another supplier with a lower price, think carefully before you switch. Bouncing around between suppliers can make your business look unstable, and might make it less likely for good suppliers to want to do business with you.

Always keep in mind that your suppliers are also in business. They are also trying to get the most value out of what they are providing. Your relationship with your suppliers should be one of mutual benefit. Your suppliers do not owe you special deals, but this does not stop you negotiating on price. Just remember it needs to still be worth it for the supplier—no supplier wants to deal with a customer who won’t allow them to make money too!
 
Factors to Consider

If you stick with a supplier long enough you may be seen as a valued customer. In such a case they will probably have a lot more tolerance for special deals, changes in orders, and requests for new products.

However, always be aware of your options. Keeping with one supplier does not mean they will automatically offer you the best deal – if they do not recognise you as a valued customer, you may be better off switching suppliers.


More Practical Tips to Improve Profitability


There are many other ways to improve the profitability of your business. Some of these are as follows.

Increase Productivity

Your business should always be aiming to produce its product or service as efficiently as possible. That is, make more products with a set amount of inputs, or the same number of products, but with less inputs.

Examples of ways to do this include:
  • Avoiding the need to pay staff overtime payments at a higher hourly wage rate. Plan work in advance so it can be done during normal working hours.

  • Providing training to staff who are slow or unconfident, so they can produce a higher amount of quality work in a shorter period of time.

  • Reviewing staffing levels and thinking carefully before employing additional staff – if you only need someone for a certain number of hours per week, do not employ them on a full-time basis.

  • Using technology to speed processes up or do tasks cheaper. For example, keeping important files on shared drives or online means staff members can access these immediately and as required, and using accounting software instead of doing tasks like payroll manually.

  • Using technology to plan work more efficiently. For example, use GPS technology to see where tradespeople are so you can send the closest person to new jobs which come up during the day (reducing petrol costs and travel time).

  • Choosing more efficient equipment.

  • Finding ways to reduce waste and employee ‘downtime’. Something as simple as having a water cooler situated close to employees will reduce the time they spend walking to the lunch room to get a drink of water.
You should be constantly on the lookout for inefficiencies to eliminate so that you can make your business more productive. This helps you increase revenues while keeping the same costs, lower costs while keeping the same revenues, or lower costs and increase revenues. New technologies that have the potential to increase efficiency appear on a fairly regular basis, so keep an eye out to see what is available.

Regularly review the processes used to produce your business’s product or service. Look for ways these processes could be streamlined without impacting quality. Employees who are involved in these processes will often have good ideas about what could be changed. It also helps to keep up with the latest news and trends in your industry. You can do this by reading industry publications, attending conferences, or joining industry associations.
 
Tip

Setting clear targets for productivity can be motivating for your staff. If you communicate well, and set the right tone, you can get the team excited about reaching the targets. Consider giving small rewards when targets are exceeded, but ensure the cost of the reward does not offset the benefits of the increased productivity!


Reduce Costs

A few ideas to reduce costs, and therefore increase productivity, are as follows:
  • Reduce your power costs through conservation or by changing providers.

  • Avoid unnecessary travel expenses, such as by using video calls rather than visiting clients in person.

  • Identify suppliers you can approach for better terms.

  • Cut advertising where you cannot measure results (focus on forms of promotion for which you can measure the benefits relative to the costs).

  • Encourage a ‘paper-less’ workplace to reduce printing costs.

  • Lease (or sub-lease) unused parts of your premises to another business.

  • For online businesses, consider using more than one courier – for each customer order received, choose the cheapest courier out of the options you have available.

  • Weigh up the cost of owning a business vehicle, against reimbursing yourself for use of your personal vehicle.
If you’re sure your costs can’t be reduced, then re-consider your pricing. You’ll need to convince your target market that your products or services are worth the additional price. This can include making sure marketing is effective and making sure your customer service is up to scratch.