Making a profit is the goal of many businesses. Entrepreneurs go into business to make a profit. But all too often businesses close after a few months or years. But why? Many times, it is because the business owner has been laser-focused on one aspect of the business rather than having a balanced overview of the business.
What are profit drivers?
They are the elements in your business which cause your business to make a profit. These drivers can be financial or not. But every aspect of your business can add or subtract from your profit. There are some business owners who use profit and revenue interchangeably and this needs some correction.
Profit is the money left over after you have deducted total costs (fixed and variable) from your revenue. Revenue is the full amount of money paid into your bank account. For example, let’s say you sell a pair of slippers for R20. The revenue will be R20. The profit will be R20 minus the cost to make the slipper. So if it takes R18 to make the slipper, your profit will be R2.
Let’s look at five profit drivers in your business:
1. Sales
Yes, more sales does mean more money in your business, but we need to have a full view of the finances and not just the sales. Because as sales increase, so do some of our costs. Sales are a very good starting point though, especially if your sales are very low. You should review where your best sales come from and then focus your marketing efforts on this target client. You can also review your sales consultants and see if there are any problems which are preventing them from working at their best.
2. Costs
As mentioned above, with more sales, your costs will go up, especially your variable costs. Look at your process to manufacture goods or offer services. Are there steps which could be automated? Are there places where you are inefficient? By improving your processes, you can save some money. If you keep stock, are the products moving quickly enough or are they becoming dated on your shelf? It is important to review which items are selling well and have the highest profit margins and which aren’t. The items which are moving slowly could be packaged with other items to help them move quicker off your shelf.
3. Staff turnover
This might seem like something which would have no impact on your profit, but each time you need to hire and train a new staff member, you spend money which may take a while to recoup. It is necessary to ensure you keep your staff happy and offer them incentives to keep them. Have quarterly meetings to chat to your staff and see how you can help them to grow in your business and to keep them happy.
4. Debt collection
Do your customers have accounts with you? How many of them are overdue? This is a place where you need to be consistent. Keep track of your overdue accounts and ensure you contact your customers and enquire about payment. If a customer’s accounts are overdue, you should freeze them until you receive payment. This is important because until you receive funds for services rendered, you will be bleeding out money for goods you sell to your defaulting customers, and this could eventually eat into your profits.
5. Pricing
When was the last time you changed the price of the goods or services you sell? Many service-oriented small businesses struggle to increase their prices for fear of losing clients. But every year, the cost of living goes up and if you keep your prices the same, then eventually you will be making less profit. It is therefore important to review your pricing every year and make adjustments accordingly, especially if your suppliers have increased their prices.
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