There are only 4 vital factors that have the potential to increase your small business profit and dramatically grow your business in any economy!
Now here is the existing part. You don’t have to make big improvements in each of these 4 areas to see massive results. Within each of these areas there are many actions you can take. Regardless of what works best for you, the important point is that a modest increase in each of these areas can result in a dramatic increase in small business profit and income in any economy.
The 4 key business drivers affecting the profitability and growth of any business, including yours are:
Your total sales every month.
Your variable costs you have in producing the products and services you sell.
The price you charge.
Your fixed costs, these are cost that don’t change when sales vary.
How to Increase Small Business Profit - Step by Step
In order to maximize profit in any business, you have to increase your sales volume, decrease your fixed and variable costs and increase your profit margins. Follow the following steps to drastic increase your profits.
- Determine your numbers
- Reduce business fixed cost
- Reduce business variable cost
- Increase business profit margins
- Increase sales
You can also look at one of our Free Training Courses "Double or Triple your Profit in 90 Days or Less", to help you make a huge impact on your profits.
Step 1: Determine your numbers
Before you start selecting and implementing strategies to improve your profit, you need to determine what your current numbers are. This is a very important step, as you need to know where your business is. Now, and where you want to go, otherwise you will not know how successful the strategies was for increasing your small business profits.
To help you with analyzing your business and coming up with the best solution for your business we have made available several Free Tools including the one that we used in the images below.
Step 2: Reduce business Fixed cost
Focus on reducing Fixed and Variable cost first, because it is very important to make sure you are profitable before you start to increase sales. This is also the fastest and easiest way to increase profits because you can implement it immediately, although it may take a few weeks to see the results.
Increasing sales is widely seen as the key to increase profitability but this is a misconception. Sales are only one of a number of factors making up the profit formula. You need to understand how these factors work together to make informed decisions to improve your profitability. Time and again, sales figures, if increased in isolation, have failed to deliver increased profits.
Fixed Cost are the costs that stay the same from month to month just to keep the lights on and the doors open. Like rent, utilities, advertising costs, taxes, and owner salaries and laboring cost.
Whatever the size of your business I can tell you this, you can always cut costs. Out of experience, I know that any business can reduce costs by 10%. So don't forget to be tough on costs to save your business or to increase profits.
“Expenses will always rise to meet income”
- Brian Tracy -
Analyze and evaluate each and every expense on an individual basis. Make sure you get the most out of it and that you are paying the minimum for that expense without jeopardizing your business. Keep an open eye and open mind, be very creative and you will be surprised at what you can accomplish.
To reduce your cost with 10 % is actually very easy. If you take 10 different expenses and only save 1% on each of them you have accomplished your goal. Remember small changes in all areas = big difference. Use the tool in the previous video to help you evaluate each and every expense on an individual basis.
PS: To learn more you can read: "How To Reduce Cost In Business Safely: Step By Step!"
If your current Net Profit Margin is 10% and you reduce your expenses with 10% It is equal to increase your sales with 90%. The opposite is even worse. If your expenses increase by 10%, with the same profit margin, you need to increase your sales with 900% to earn the same profit.
Step 3: Reduce business Variable cost
Variable Costs, also known as COGS (Cost Of Goods Sold) or COGM (Cost Of Goods Manufactured) or Variable Costs because they vary with the number of units you sell. Double your sales and COGS will double. Sell zero and COGS will be zero. This is the cost to produce or purchase your product (including materials, inventory change during the month, labor, packaging, commissions, and freight into your company) or to perform your service (hourly rate, supplies, expenses for travel to client, entertainment, miscellaneous service-related costs).
The first way to think about managing COGS is percentage. Your COGS should be a certain percentage of your sales. The actual percentage varies with your product and your industry. Know what percentage of sales your COGS should be for each product. Lower is better - makes you more profitable and less vulnerable to competition.
But Cost reduction is not simply attempting to cut any and all expenses randomly you need to understand how these expenses relate to your sales, production, customer service and other parts of your business. Sometimes you can achieve greater profit through the more efficient use of resources. Remember, the goal is to reduce business expenses without sacrificing quality or lead to negative consequences
PS: To learn more you can read: "How To Reduce Cost In Business Safely: Step By Step!"
Variable cost is normally your biggest expense. In general if you are like the majority of businesses out there this cost will make up plus minus 75% of your total expenses. A small saving or improvement of only 1% in this area can have a huge increase of up to 70% in net profit
Step 4: Increase Business Profit margins
Every small business has the potential to charge a higher price for its products and services, if you are able to market your products and services in such a way that the client sees the added value. One of the biggest barriers preventing small business from making acceptable profit is their price. You are not in business to match your competitors price; you are there to service your clients.
If all of your marketing, advertising and sales efforts are focused on price, then you will be beaten on price every time a competitor comes along with a lower one. In other words, if you focus on price as a critical factor, it will be one. The only way to get out of the price trap is to offer your client something different or promote added value. It may be that your competitors already offer all of these things… but unless they also emphasize this in their marketing, how will the potential client ever know? Quality is often measured by price, especially amongst your customers who may not know all the technical differences between your product or service and that of your competitors.
By charging your premium price you are different from your competition. Your customers will subconsciously believe that yours is better quality because the price is higher, making it easier to sell. Don’t fall into the trap of pricing down the bottom of the market with the rats and mice in your industry. Be confident to charge your premium price and, as long as you can back it up with a quality product and service, you will gain a greater market share and a more profitable business Even if you’re selling the exact same product as your competitor, charging a little more, may win the sale over the cheapest offering -- if you have a better reputation and service.
Of course, you can win the cheaper "bargain-hunters" out there, but they will never be loyal to you. Don’t try to be all things to all customers. Some customers only think in terms of price. Leave them to your competitors. What you should be doing is working with those people who are happy to pay for value. Your job as a marketer is to create the perception of value and then to back it up with a quality product and service. The thing to remember is that price is only important when all other things are equal.
This means first, you have to over deliver on value. And second, you have to educate your clients on the value you offer. Don’t determined your price yourself, find out what your potential customers are willing to pay. You can only find this out by testing different prices. Having the right price, will directly affect your profitability, and increasing your prices will put more cash in your pocket than anything else you can do -- Because every cent of a price increase is pure profit.
PS:To learn more you can read: "Fastest Way To Increase Profit In A Small Business"
If your business operates at a 25% markup, an 2% increase in price can have a 60% improvement to your profitability, assuming your sales volume and your fixed overheads costs remain constant. Amazing, isn’t it? And what’s better, at these numbers, you can lose up to 23% of your sales volume before your profitability drops to a level lower than where you were in the first place.
Step 5: Increase business Sales
Sales is essential - because nothing happens until someone sells something. In today’s competitive environment, marketing can make or break a company. A business can have a wonderful product, but unless it spreads the word, prices its products properly, and influence customers to buy, the business won’t generate sales and profits.
But be aware not to make the simple mistakes … aiming to increase sales, to increase profits. Increasing sales is widely seen as the key to increase profitability but this is a misconception. Sales are only one of a number of factors making up the profit formula. You need to understand how these factors work together to make informed decisions to improve your profitability. Time and again, sales figures, if increased in isolation, have failed to deliver increased profits.
The most inelegant thing you should do is:
Firstly, try to increase the amount of money every customer spends every time they buy from you. Having made a sale to a customer, you have a relationship and have increased their trust in your ability to satisfy their needs. Remember that it takes fives times as much effort and money to generate sales from new customers than from existing ones.
Secondly, try to increase your conversion ratio. Let me explain. If you are currently converting 3 out of 10 leads into customers - your conversion ratio is 30%. And if you increase that number to 4 of 10 – your conversion ratio is 40%. If you can accomplish this, your revenues will increase by 33%
Thirdly, try to increase the frequency with which every customer purchase from you. This is all about customer service and delivering on your promise. Keeping them happy Your goal should be to create customers for life. You are better off investing in your current customers and generating new business from them than you are trying to find new clients.
Then after you have taken these steps first, you can begin to increase your leads (potential new customers). While it may seem obvious to start with Lead Generation and finding new clients first, it doesn't work. Increasing Inquiries, or Lead Generation, for many Business Owners, is the most common way of increasing sales. The reason for doing Lead Generation last, is that marketing and advertising can be one of the most expensive ways to market your business. It can also be the most costly if you don’t have the right marketing strategy.
Maximize what you already have First. It makes sense to work on increasing your conversion rate from inquiries to sales, increasing the average transaction value and increase the number of times a customer buy from you first before you increase your leads
Use the "Simple Sales Tool" (Image below). You can find it on our free tools page.
Use the "Profit Mini Sniper Tool" (Image below). You can find it on our free tools page. Test your new price strategy in our Profit tool and have fun, play around with your numbers, change a percentage or two in your business and see how you can maximize your small business profit and create extraordinary results.
Thanks for reading, Talk soon