Every day, thousands of small business owners find themselves facing a trend of negative profits. What happens when profitability heads south? How do you salvage a sagging bottom line? Although many of their businesses are potentially viable — even profitable — owners sometimes struggle with knowing where to begin to increase profits, despite the fact that the answer may be right in front of them.
Smart small business owners know that when times are tough, the financial statement is the place to start.
An accurate income statement should give you a good indication about what is and isn't working when it comes to selling your business' goods or services. Track income over a period of several months and match it against your marketing initiatives to decide which promotions are winners and which ones are losers. If your business relies on a sales team, break it down further to determine which reps are pulling their weight and which ones simply aren't. Once you've got the data in hand, take action. To increase profitability, cut the marketing programs that aren't making money and fire sales reps who are not earning their keep.
An analysis of sales should include a reevaluation of your pricing. If you haven't raised your prices for years, maybe it's time to bump them up. Assuming your customers don't mind the increase too much, that's the quickest route to higher revenues and greater profitability.
Is it possible to be profitable and flat broke at the same time? Absolutely, especially if your company is dropping the ball on receivables!
Your accounts receivable should appear as a line item on the balance sheet. If your receivables are out of line, that could explain a lot about why it feels like your company is operating in the red even if you are experiencing a healthy bottom line.
Get proactive on collecting the amounts owed to your company and watch that sinking feeling disappear in no time. It's a good idea to look at your receivables at the beginning of each week and see what you can collect. Give your customer a call or send a friendly email reminding them their invoice is due.
Collecting receivables early puts money in the bank that you can use to grow revenues and it minimizes the risk of having to write off past revenues as bad debt.
To encourage prompt payment, charge late fees for overdue receivables. You may also want to consider offering a discount for early payment.
Another big area worth examining is expenses. Cutting unnecessary expenses is the quickest way to turn around an ugly bottom line. But be careful!
The key lies in the word "unnecessary." Some expenses are absolutely vital for profitability. For example, while it might be tempting to make cuts in advertising, doing so may be a big mistake — particularly if the ads are your primary avenue for connecting with your customer base.
The best way to find unnecessary expenses is to review past expenses in your check ledger and credit card statements. Was the expense worthwhile? Through this process you'll find a number of things you can cut — for example, a magazine subscription that nobody in the office even bothers to read.
It's also a good idea to focus on reducing expenses that you cannot cut altogether. As an example of this, one small business owner was paying $600 a month for dedicated Web hosting. After looking into it, he determined that shared Web hosting would suffice and it only cost $60 per month. That smart business owner saved $540 per month. That's a $6,480 annual boost in profitability!
When reviewing your financial statements, it's important to make decisions based on comparisons with previous quarters and years. By nature, some industries and businesses experience cyclical trends that can look like they're losing profitability even when they are on course for a banner year.