Dec 152011

Every business needs to make a profit to survive and, generally speaking, the more profit we make then the better the business is, the more likely it is to survive a recession and the more likely it is to grow and flourish.  There are five fundamental ways to increase profits that you need to know when starting a small business and they are as follows:

  • Raise the selling price
  • Lower the cost of sales
  • Focus on the high margin items and ditch the low margin ones
  • Increase the volume of sales
  • Lower your overheads

Raise the selling price

This is all about raising the gross profit margin, ie increasing the gap between what something costs and what you sell it for.  Many people are paranoid about raising their prices (“I’ll lose my customers if I raise prices!”) but you shouldn’t be, for two reasons.  First, you shouldn’t be selling on price alone, you should be selling on the service you provide to your customers.  They should consider price a secondary issue in comparison to the excellent service you provide to them.  Second, you can increase prices and lose custom but still make a better profit.  As an example, if your gross margin on a product is 20% and you increase your price by 10% you could lose 33% of your custom on that product and end up with the same profit.  If you expect to lose 33% of your customers with a price hike then, to be honest, the price hike isn’t the issue…

Lower the cost of sales

Like raising prices, this is all about gross profit margin.  For a product this might mean buying in larger quantities; for a service provision this might mean delivering it in a more efficient manner. Look at how you buy or deliver and see where you can make savings.

Focus on high margin items

Like with troublesome customers you should aim to drop products/services that don’t cut the mustard.  This is another reason why you need to regularly check your profit margins because until you do you don’t know which ones are really bringing in the money.  Your low margin products probably take as much time to sell it as a high margin one – and all the time you’re selling the low margin one you can’t sell the high margin so you’ve just done a double whammy on yourself.

Increase the volume

Don’t try increasing the volume until you have identified the high margin items, otherwise you could waste a lot of time and effort for little return.

Lower your overheads

Again, don’t try this until you have done the other 4 steps otherwise you may end up cutting something out that you need to sell the high margin products/services efficiently.  Lowering overheads is something that can be worrying for the team; if they see cutbacks they often associate them with a business going down the pan so be careful to ensure that they are kept in the loop as to what you’re trying to achieve.
So, if you want to run a small business effectively and increase your profits the five items above will put you in a pretty strong position.  They’re tried and tested ideas but you would be surprised how many businesses don’t use them.  But that’s good for you, isn’t it?!