In a company’s early days, founders are primarily focused on getting the venture off the ground. Once up and running, owners should get into the habit of thinking strategically about ways to increase profit margins and cash flow by improving how the business operates. Many small and midsized business owners look to maximize profits by minimizing the costs of goods sold (COGS). Sure, strong revenues with low COGS can help boost margins, but there are other factors to consider. Be warned, however: digging into the details of your business may likely uncover things you need to change in order to improve performance.
- Understand Your Cost Structure
A smart place to start is to understand where you spend your money. You can work with your accountant or bookkeeper or take advantage of cloud-based accounting solutions to analyze your cost structure. This will give you visibility into how your money is spent. With that, you can then see where and how you can save. There are likely alternatives to a number of your current processes that can help reduce costs, which can, in turn, increase margins.
- Replace Expensive IT Staff With Outsourced Service Providers or Programs
Consider replacing full-time information technology (IT) staff with less expensive outsourcing firms specializing in on-demand services. These firms often provide live Internet-based desktop connection support to small businesses. If you’re comfortable with your tech skills, you may want to troubleshoot IT issues on your own and call in a professional for the tough cases.
- Optimize Your Footprint
Real estate and equipment are two significant expenses for businesses of any size. Many small business owners begin with a home office, which can help reduce many costs right from the start (e.g., rent, utilities, IT/phone equipment). As a business grows, however, moving out of the home office is sometimes necessary.
Before committing to renting or buying a space, it’s wise to think through a potential interim solution. Consider temporary space first, which often includes administrative support, internet access, meeting and conference room spaces, and even office equipment.
Never forget the cardinal rule when renting or purchasing real estate: Negotiate, negotiate, negotiate! Make sure the location makes it easy for your clients to access your business (i.e., is there adequate parking, good visibility from the street and curbside appeal?). If renting, might you consider subletting a portion of your space to help defray costs? Might you barter by offering the landlord your service or product in lieu of payment?
To further help maximize your footprint and reduce pressures on your margins, also consider buying used equipment for your office. There are many suppliers that offer gently-used furniture, equipment, and tools for businesses of all kinds.
- Increase Pricing Through Increased Value
Cutting costs addresses just one side of the profit margin equation. Don’t forget about increasing your revenue through increased prices based on enhancing the value of your products and services. To do this, consider these three steps:
- Evaluate your pricing — How does your profit margin compare to your COGS? Are your goods or services priced appropriately for your target customer segment? Depending on your target segment, you may be able to increase profit margins by increasing the price of your goods and/or services. Reach out to your earliest clients and ask for candid feedback on your pricing.
- Research your competitors — How much do they charge? How does your pricing model compare to theirs?
- Offer premium solutions — By offering premium products or services, you can gain more share of your customers’ wallets. Can you offer different bundles or packages that include higher value offerings? If you offer premium features and service, you can charge a premium price.
There are many ways to increase profit margins, but they all involve boosting sales and revenue while reducing costs. Take a careful look at your own business to find opportunities to do both. Remember, this might be hard to do because you have to fix things you did not even know were broken.
About the author: Chris Rush is the Division Vice President of Strategy & Business Development for ADP® Small Business Services.
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