Everyone wants to turn that business they started in the back bedroom into a well-known enterprise, but how do you get there? In addition to hard work and dedication, creating a lasting business is centered on profitability.
If your business is never able to earn more money than you are spending, you won’t be able to afford to keep the business running without constantly infusing your own money into the company. Although generating a profit does take time, there are only two ways to improve profitability: increase revenue or decrease expenses.
Option #1: Increase Revenue
The first option when it comes to improving profitability is to increase revenue. How much profit is currently built into your product or service? Ideally, you want at least a 30% profit margin built in, which means for a product that you sell for $100, all of the costs associated with generating that product should only be $70. Uncovering your cost per product can be done through accurate financial statements.
If you find that your cost per product is not favorable, consider increasing your prices. In addition, as your experience and customer base grow, your prices should grow as well. This means if you started your business 5 years ago, you shouldn’t be charging the same prices. You have expanded knowledge and you must adjust for inflation.
Another way to increase revenue is to add on another revenue stream. How can you branch off your current product or are there additional services you can offer? For example, let’s say you run an Etsy shop building cutting boards. What else can you build? How about kitchen drawer organizers? Think of your current products and services and brainstorm how you can expand.
Option #2: Decrease Expenses
The other option to improve your profitability is to cut costs. If your revenue stays the same, but you decrease your costs, your profitability will increase. Take a look at the income statement and see where your revenue is being spent. Is there a large amount of subscriptions you don’t use? How about high supplier costs? Pick one or two categories that you are going to actively track to reduce costs.
If you operate a business that has a high amount of fixed costs, look for ways to reduce those. This may entail finding a new supplier or renegotiating terms with your current supplier. You may find that increasing your order quantity saves you money instead of placing frequent orders. Keep in mind that some costs should not be cut, such as marketing and advertising, as these help you sell your products and services.
Summary
Increasing profitability is a top goal for many business owners as they want to see that hard-earned money back in their pockets. The first step in increasing your profitability is to have accurate financial statements to base your decisions on.
The team at Gordian Financial understands the value accurate financial statements and regular bookkeeping provide to business owners. We work with you to find the accounting services your business needs to increase profitability. Reach out to a team member today for more information.
