profits

Small Business, Large Profits

All small business owners want to increase sales, open new locations, obtain more customers, add employees and grow, grow, and grow some more. It sounds good, but is it really necessary? Is there an alternative?

Necessity: It is necessary to grow your business as the alternative isn’t too appealing. You have financial obligations and people that depend upon you, such as family, employees, and customers. So, yes, it is necessary, however, here is a different view on growth.

Focus on profitability: If you double your profit margin then this has the same impact as doubling the sales of your business. Even if you increase the profit margin by several percentage points then it has the same impact as increasing sales. It sounds too easy, but here are some ways to do this:

  1. Decrease the number of services/products. Spreading yourself too thin usually decreases your profitability because it is hard to do everything well.
  2. Service the proper clients by targeting a more defined niche.
  3. Use marketing methods that only target the customers that you want to serve.
  4. Plan ahead for large purchases or investments, including space requirements, people, vendors, equipment, and technology.
  5. Price your products and services properly.

The interesting fact is that when you are more profitable, then each additional dollar of business is worth more to you, which makes it easier to actually grow further.

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Increase Sales or Cut Expenses?

What should be the focus? Should we increase our sales or cut our expenses? All of the marketing and self-development gurus tend to focus on increasing our sales, but other financial experts want us to focus on cutting costs and debts. Who is right and what should we do? Let’s look at the pros and cons of each:

Cut your expenses and debt: Being aware of our expenses and cutting unnecessary expenses is a smart move, along with reducing debts. However, cutting expenses will only go so far because you need to incur expenses to support your business operations. Reducing debts is also a smart move, but this should not be done to the detriment of using up all of your cash, otherwise you will go right back to increasing your debts.

Increase your sales: Every business should look for ways to grow their sales, as a business tends to naturally deteriorate over time. An increase of sales can and should lead to an increase of profits, but not always. Many times, a business will increase sales activity, but their profits may actually decrease, stay flat, or only increase incrementally. The main reason for this is due to the fact that a business needs to spend money on marketing, people, technology, and infrastructure to be able to support higher sales.

The optimum solution: Instead of focusing on either or, you should focus on both to some degree, which is what the most successful companies do. Instead of just growing your sales haphazardly, you should focus on growing your sales profitably. To accomplish this you will need to perform some simple math to make sure that you are focusing on profitable services and products and delivering them in a profitable way as not every dollar of sales is equal. Better profitability will also allow a business to have excess cash to help pay down debts and not get into more debt. Without a focus on profitability, a fast growing company will tend to have cash flow issues, and companies that focus on cutting expenses tend to cut themselves into irrelevancy.

Where is all of the Money Going?

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You’re a small business owner, keeping busy, but there always seems to not be enough cash.  An entire book can be written on this subject, but here are a few reasons why you may feel your business is short on cash:

Taking too Much: Unless you have other income sources, you need to either take distributions or a paycheck from your business to live. The problem arises when you take too much and leave the business cash-starved.

Paying off Debts: If you have business debt from loans or credit cards, it can create a cash drain. Even if your business is showing that you have made a profit, you may not have much cash to show for it. This is because only the interest paid actually shows up on the profit and loss statement.

Collections: If you don’t actually collect the money from customers then it is the same as never having made the sale. Actually, it is worse because you have spent your time and incurred expenses.  If this is an ongoing problem, then you need to modify your collection procedures.

Grow the Business Profitably: Every business needs to grow every year as expenses usually only increase.  If the business needs more cash and you do too, then you need to grow both your sales and profits.

These ideas may seem simplistic, but they are extremely powerful. They all relate on the importance of using your financial information, a.k.a. boring accounting stuff, to run your business better.