Staying profitable is one of the biggest challenges a business faces as it grows. Unless you’re one of the Ubers or Spotifys of this world, being unprofitable is detrimental to your business.
Small businesses need to be smart when making management decisions and pay very close attention to their income statement from month to month. Even so, many business owners fall into the trap of assuming that healthy revenues naturally translate into profit – but that’s not always the case.
Profit is what remains after you subtract your costs from your revenue. If there’s nothing left over, your business is losing money.
To make sure it doesn’t happen to you and your business, here are eight common business problems that hurt profitability. As well as the steps you can take to increase profit in the short term and retain that profitability over the long term.
Don’t cling to an outdated pricing strategy
If your business is struggling to stay in the black, then you may need to revisit your pricing structure and look for ways to optimize it for profit.
This could be a simple price increase or a more complicated shift from ‘off-the-shelf’ pricing to a more bespoke model or even the introduction of subscription products.
Changing your pricing can be a daunting task. Especially if you have long-standing customers who might not take too kindly to it, but can you really afford to go on supporting customers who are draining your profits?
It’s essential to use cost modeling and market research to ensure you get this right the first time and don’t have to repeat this exercise over and over again.
Focus on reducing direct costs.
If price changes are not an option right now, consider ways you can reduce your direct costs.
A direct cost is one that you can tie directly to the production of a specific product or service. Because you incur direct costs on every sale you make, reducing them by even a small margin could result in a significant increase in profit.
Doing this may require you to review other suppliers, renegotiate rates, or streamline internal operations and delivery processes to make selling your product or service cheaper.
Make sure you’re managing your overhead costs
Overheads are all the costs you incur simply by running your business. These can include wages, equipment costs, office rent, marketing expenses, and, depending on your industry, other costs like transportation and maintenance.
High overheads can severely hamper profitability, so you should regularly review these costs and compare what you’re paying to industry averages or competitor businesses.
Working with an accountant to identify areas where your overhead spend could be reduced is the easiest way to spot cost-saving opportunities. An experienced accountant will know your industry’s average costs and let you know where you’re overpaying.
Avoid supporting unprofitable products or services
Taking a step back and taking stock of which products and services generate the most profit for your business is a great way to discover the areas you should focus on to increase profit overall.
You need to see (in detail) which product lines are producing high margins, and which are barely staying at the breakeven point.
So, dig down into your accounting data and focus your efforts on developing the more profitable products or services. While you’re doing that, be sure to retire the ones eating away at your profitability.
Retire old product or service offerings
Are you thinking of opening up space in your product catalog by retiring unprofitable lines or looking for new opportunities to tap into trends in the market? Launching new products and services that your customers want is a strategy used by some of the biggest global companies to ensure they increase profits year on year, and it’s one that you can harness too.
This is a slightly longer-term profit strategy than the cost-cutting exercises we mentioned earlier. This is because you may have to invest in innovation, research and development, and production to launch your new product.
However, if you know your market and you’re confident there’s an appetite for your new product or service, profits are almost guaranteed. You only have to look at brands like Apple, Nike, Sony, and Disney to understand the importance of knowing your market and regularly launching new products you know they’ll love.
Cash flow projections are a vital part of planning a new product launch. It would be best to look at all the costs associated with your new product or service vs. what you expect to make to ensure it’s a profitable venture for your business.
Don’t overpay for new customers
Although every business understands the importance of getting new customers in the door, not all appreciate how to do it profitably.
It can cost a lot of money to ‘buy’ new customers through marketing and sales efforts. Make sure you understand how much a new customer is worth before you spend money acquiring them.
Cost-effective ways to reach new customers include:
- asking existing customers for referrals,
- using your network and reputation to raise awareness, and,
- generating referrals through partnerships with other businesses that complement yours.
Try to upsell existing customers
Your base of existing clients is home to an untapped reservoir of profit. For most businesses, some 65% of their sales come from existing customers. These customers are 40% more likely to buy a new product or service compared to new customers.
If you’re planning on launching a new product, don’t jump into an ambitious marketing campaign to get new customers on board and reach out to your existing customers to offer them the product first. They’ll likely give you your first few sales, and at a very healthy profit margin too.
Don’t set profit planning goals out of panic
Once you realize your business is slipping towards becoming unprofitable, it can be tempting to take every opportunity to cut costs to steady the ship.
Be warned – this approach can sometimes do more harm than good. If you act too quickly or cut back too much, you can severely limit your routes back to profitability. This is how a small leak can soon develop into a massive breach, and before you know it, your ship is on its way to join the Titanic.
Setting profit goals that are too ambitious can create disappointment when they’re inevitably missed. They could also result in you not making the best use of your available resources as you focus everything on one unattainable goal.
The best course of action is to work closely with your accountant to set incremental goals, slowly edging your way out of a thin profit situation, or even a deficit, and towards becoming profitable again.
Your accountant plays an important role here. They’ll cast a critical eye over your business finances and help you develop a sustainable strategy that’ll increase profits.
The bottom line is that businesses need to be vigilant for unprofitable signs and be aware of opportunities to increase the profits within an already profitable business. If you want to learn more, read about the top accounting problems costing you money or schedule a call to learn more about our part-time CFO services or outsourced accounting services.