Achieving success as a small business owner requires a proper focus on profitability. Although it’s common for new small businesses to endure a period of time when they’re operating at a loss, it’s a mistake to think you can just work and the money will take care of itself. Similar to every other aspect of the operation of your business, profitability will only be maximized if you carefully attend to it. It’s all the more important to focus on profitability when starting out — a time when resources and revenue may be somewhat limited.
Many new small business owners make the mistake of focusing on revenue, when they should be paying greater attention to costs. You have much more direct control over your costs than over how much money comes in. It’s also much easier to accurately forecast costs, as opposed to revenue.
First and foremost, it’s critical to have a good handle on the exact amount of your expenses. That means understanding specific costs, like the per item production or wholesale cost for each of your products. When figuring costs, don’t overlook such things as licensing fees, insurance, packaging, and shipping expenses. If you buy 10 wholesale items at $1 apiece, plus pay $10 shipping, your actual cost per item is $2, not $1.
A good measure of business management is operating margin, your profit margin after subtracting direct production costs and overhead costs such as salaries and office space. This profitability metric is often used to evaluate how efficiently a company is managed. Anywhere you cut expenses and improve your operating margin will be amplified in the effect on your bottom line net profit margin. When you examine your profit margins, compare them to those of similar businesses to gauge how well you’re doing.
Steps to Increasing Profitability
Analyze each expense in terms of productivity — its cost versus the extent to which it contributes to increased revenues. Every cost should be viewed as an investment and examined for what kind of return you get on that investment. For example, before adding an employee, determine how adding the employee will pay off for your business in terms of ultimately increased revenue or profitability.
Continually review expenses for possible savings. For example, check your banking fees and see if they can be lowered. Evaluate the possibility of renting equipment instead of purchasing it. See if you can cut your electricity or other utility bills. When you’re just starting a new business, you can increase your profitability by doing things like cleaning your office space yourself rather than paying for a cleaning service.
Use monthly and weekly sales goals to keep focused on generating and increasing revenues. Setting goals helps to keep your business consistently moving forward and growing.
Examine different revenue-generating aspects of your business, such as different product lines, and make sure you’re dedicating most of your time and resources to the most profitable areas of your business. If one product line is vastly more profitable for you than another, then focus on sales of these products, rather than ones that generate a smaller return.