The fundamental, albeit harsh rule of business in a capitalist economy is that if you cannot produce a profit, then you cannot survive.
Many small business owners find themselves wondering why they sell so much relative to their competition, but still struggle to see adequate profit. Well, this question can be answered with a common cliché of both business and personal finance: ‘It’s not what you make, but rather what you keep that defines your financial success’. The only way to truly increase your profit is to evaluate your business holistically and determine how you can increase the portion of your sales revenue that you keep.
The common mistake often made by small business owners when earning low profits is only seeking the answer to one question: ‘How can I keep increasing my sales?’. In reality, profit increases are achieved in 2 ways – reducing spend (costs) and increasing revenue (sales). Let’s take a look at 5 strategies for successfully achieving both
Decrease Your Direct Costs
We’ll touch on strategies for increasing your sales in a bit, but let’s first focus on efficiency and that begins with operating more as a ‘lean’ business and reducing costs. Direct costs are the expenses that show up on your profit and loss statements each month. They are tangible expenses that you are absolutely aware of, as you are physically paying them out on a periodic cadence.
The first way to reduce the direct cost of your goods sold is to negotiate with your suppliers. You want to develop a mutually beneficial relationship with your suppliers whereas they value your business and are willing to move an inch or two in pricing to help you achieve higher profit margins. We’ve discussed specific supplier negotiation tactics in several Counter Culture posts, but a great place to start is our recent post titled Your Guide To The Delicate Art Of Squeezing The Most From Your Suppliers.
The second way to reduce costs is by decreasing your inventory, better known as ‘stock control’. Keeping up with your inventory and knowing what you should or should not carry will improve your margins. Some small business owners order inventory arbitrarily and do not use data at all when deciding on quantities. A solid POS system with great inventory management capabilities and reporting will help you substantially when determining where to cut back.
The third phase of reducing direct costs is trimming down your operating costs. Many business owners assume that these are mandatory and cannot be compromised. The truth is there is almost always room to save—ranging anywhere from telecom, web hosting, equipment, to even minute expenditures like paper—trim where you can and you will notice the overall impact on your bottom line.
Decrease Indirect Costs
While indirect costs are as the name implies, tough to recognize, they also hurt your profit. These are intangible expenses that you may not realize immediately, but still have a sizable impact on your books.
Two such examples of decreased indirect costs that can substantially increase your profit are waste and variance. Let’s look at an example for tracking waste: If a bakery bakes fresh bread and pastries each morning and has to dispose of everything that doesn’t sell at the end of the day, then keeping close track of the average amount sold per day will help determine how much to make each morning and thus reduce the amount thrown away (waste). In retail stores, variance is an important metric to track as well. Variance is the difference between the inventory reflected on your reports and the actual amount on the floor (accounting for missing or stolen items). The closer these stats are tracked, the easier it is to reduce the associated costs.
Another indirect cost to many small businesses comes in the form of employee errors. If employees are ringing up incorrect amounts at the register, or as an owner you find yourself giving things away to customers as an admission for a costly employee mistake, then your business is incurring an implicit cost – be it the time lost rectifying these issues or the increased likelihood of that customer not returning to your store. Find ways to reduce all of these occurrences to help boost your profit.
Increase Your Sales
When business owners think of ways to increase the total amount that they take home, this is automatically what they think of first, the neverending question – ‘how do I sell more?!’. We’re going to look at increasing sales through 2 viewpoints: getting more sales out of your employees, and expanding your distribution channels to boost sales.
The first way to increase sales is by monitoring employee performance and finding new ways to get them to sell more. Better sales training, if possible, is a great way to achieve this. Incentivization is another way to motivate your employees to increase their effort and achieve greater sales results. Run contests to motivate and reward your top performers to take it one step further.
The second way to increase sales is by looking for new distribution channels that you haven’t already taken advantage of or maximized efforts on. Ramp up your marketing efforts in social media, online content, and SEO. Focus on expanding your sales base to attract new customers for your employees to sell to.
Increase Your Average Sale
You don’t necessarily have to increase your sales by an astronomical number to boost your revenue and profit. Rather than focusing solely on increasing the number of sales that your employees get, also work on increasing the average value of each sale. This is an opportunity that the vast majority of small business owners overlook. There are several ways that you can increase your average sale:
- Train your staff to upsell : Squeeze more revenue out of every sales opportunity by teaching your employees to offer additional items to customers at the time of sale. Try incentivizing your employees with various contests. For example, you can offer a contest like ‘the person with the highest average sale this week gets a prize’ or ‘the person who can sell x item along with y item the most times this month receives a bonus’.
- Try bundled solutions : You may discover that some customers will find a need for an item when it is coupled with another. Giving a small discount for a packaged deal may help substantially because it may allow you get items off the shelf that you would otherwise struggle to sell.
- Raise Prices (in moderation) : Sometimes small price increases can boost the average sale without turning the customer away completely. If it’s a valued product, perhaps increasing the price a little won’t hurt your sales numbers.
Analyze Your Profit Margins
Use data and analyze, analyze, analyze! Every single step above implicitly requires this one to maximize the result. Here are some broad examples of how you can analyze specific profit scenarios:
If you have items that have a high profit margin and tend to fly off the shelves, then you should have your employees focus on them! These items are both generating relatively high profit on a per-unit basis and selling well. For items that have a low profit margin but fly off the shelves, figure out how you can reduce costs – such as supplier costs, shipping to your store, etc. If there is any wiggle room, perhaps also try increasing the price slightly since it’s a popular item that is selling well.
Now let’s look at some items that may not be selling so well. If you have items that have a high profit margin but just don’t sell much, think about their placement in your store. Perhaps if you make them a bit more prominent to your customers by placing them at the entrance or closer to checkout, then they will perform better. Also, have your employees focus more on pushing them out to customers. Items that don’t sell well and have a low profit margin are the ones that you want to avoid. Be sure to minimize or maybe even get rid of them altogether. They don’t generate much profit and also don’t bring in much revenue as they rarely sell. Reduce the amount that you have in stock or just stop carrying them.
There are many more examples, but without the proper analysis, you will never know where to begin.