When you sell a certain quantity of your product and services for a price, the money you collect is called revenue. To keep a business running you need to keep making sales to grow revenue. However, revenue doesn’t factor in all of the money you spend in making these sales. The money you have spent to make this sale is called operating cost.
To keep a business growing, you need to be making a profit. Profit is the amount of money you take home with you after you’ve paid all of your operating costs. When calculating profits, you subtract the cost from the revenue you generated. The trick is to keep revenues much larger than costs.
When starting to optimize profit for your business, it’s a good idea to keep it simple. Let’s look at these two simple equations that every business owner is familiar with:
Breaking down Profit
- Price * Quantity = Revenue
- Revenue – Cost = Profit
Let’s break down these equations to understand the levers you can pull to impact results::
- If you want to increase revenue, you can either increase prices or sell more
- If you want to increase your profit, you can either increase revenue or reduce costs
Now that you know what levers you can control, we can start tackling them individually. The easiest way to improve your revenue by increasing price or selling more of your units. However, it’s almost impossible to rapidly increase revenue without increasing costs. Next option is to reduce your operating costs, by optimizing your operations and using technology and automation where possible.
1. Your costs are too high!
When you start off a small business, money is tight. You’ve just invested in real estate, equipment, inventory, and staff. The first few months are tough, you are working long hours and save money by not paying yourself anything. Every business owner expects that the first few months will be losing money So, you rely heavily on your daily sales (revenue or “batch outs”) to pay rent, utilities, staff wages, storage, and other operating costs.
How to reduce costs in your business
- Reduce costs by automating tasks and eliminating unnecessary admin tasks
- Look for cheap and quick digital marketing wins, instead of high costing print alternatives
- If you are selling perishable items, only make what will sell – be realistic with your sales
- Go paperless – use digital accounting software and invoice tracking
- Outsource – stop doing tasks that do not make you money or that you’re not good at!
- Hire more staff! One man shows don’t last very long, get the help you deserve
2. Your prices are too low!
Prices are usually determined by the competition in your industry or location. Another driver of price is supply vs. demand. Meaning, if there’s more demand for your product/service than what the market can supply, then you can charge a higher price.
How to justify a price increase
Modify the product/service messaging to signify a value-add. Let’s look at some examples:
- Communicate your product improvements to your manufacturer to increase the quality
- Have a “limited” supply of your most sold product to create a sense of exclusivity
- Improve the packaging of your product or the packaging of your store
- Develop use cases for your product/service that solve multiple problems for your customer
TIP:If you are looking for a way to optimize profit that is specific to your business, take a quick glance at our eBook Finance 101: Financial Statements. This eBook covers business finance in an easy to understand format.
3. You’re not selling enough!
You can have the best product at very competitive and reasonable prices, however, if no products leave the shelf – that’s not good. So how do you make people aware of your products?
Promotion, marketing, free samples – things you’ve probably already tried. In addition to those, you can also try the following:
How to increase the quantity sold
Get your product in front of the right audience, with the right buying incentives in place.
- Look for wholesale opportunities to vendors that have a lot of foot traffic
- Offer bulk discounts to your customers
- Create a referral program to turn customers into advocates of your business
- You need to leverage cheap digital marketing options to boost awareness
TIP:Most of the time many small business owners cannot reach their target audience due to geographic limitations. Use our eBook Marketing 101: Google my Business to see how you can overcome these limitations.
Once you start optimizing your business operations you will a significant increase in your profit margins. The towards optimization is to reduce costs while maintaining the same revenues at first. You can then start looking at ways to increase your revenues further by making growth-related decisions. By having cost-optimized business operations, you are setting yourself up for scalability in the future. Once you’ve a process, you can start focusing on increasing sales volume and product improvement. Both of which will result in higher revenue generated, and thus higher profit.