Business is picking up, you’re winning customers, your product or service is being well received, but you’re barely making ends meet and cannot afford to scale your business – perhaps the problem lies in your profit margin.
First, make sure you understand the difference between revenue and profit. It is actually possible for your business to be generating cash (i.e., revenue) but still operating at a loss, meaning there is more money going out of the business (to cover expenses, stock, salaries, etc.) than what is coming in.
What you need to know
Revenue, also called turnover or income, is the money you receive from your customers for selling your products or providing a service. Gross profit is what’s left over from your selling price when you deduct what it costs you to make or purchase the product you sell.
Net profit is the cash remaining after deducting the costs associated with making or buying the product you sell as well as all your other business expenses.
Profit margin is the amount of profit you make from each sale, and is usually expressed as a percentage (i.e., what percentage of your sales price is pure profit that you can take home, invest or put back into growing the business).You can calculate your profit margin by dividing your profit by your total revenue. For example, say your business made R5 000 last month and after paying all bills, salaries, suppliers, etc., you have R1 500 left in your bank account – this is your profit.
What this means is that if you sell your product for R200, R60 (which is 30% of the sale price) is profit.The bigger the percentage of your profit margin, the stronger your bottom line. If the number is too small, it means you run the risk of making a loss should unexpected expenses occur. How to increase your profit margin1. Lower your expensesIf you’re bringing in a healthy amount of business, and charging a price that is in line with the rest of the market, you should look at your expenses and see what you can do without. Perhaps you’re paying a full-time employee who could get the job done in fewer hours, or using expensive materials and tools when there are more affordable alternatives, maybe you’re renting an office in a pricey location – take a close look at where the money goes and what you can remove or reduce from your list of expenses.2. Push up your pricesTread carefully here, particularly with existing customers. If you’ve underpriced your product or service, correcting it with a big price hike could put off even your most loyal customer. Make sure that your prices are still competitive and perhaps look at how you can offer more value to your customers to justify the higher price.3. Get rid of slow-moving goodsOld stock that no one wants to buy is worthless to you. Get rid of it by offering a clearance sale and then focus on your best sellers – the products that are bringing the most money into your business.4. Negotiate prices with suppliersIf you have a good track record with your suppliers and you’re bringing them good volumes, discuss the possibility of a discount. They might be open to this if you pay upfront or place a bulk order. 5. Speed up production or turnaroundIt’s simple – if you can find a way to sell more products or services to more clients your annual turnover will increase. A standardised approach or easily replicated service could help you do this. Look at where you can cut down on time spent bringing your product to market.
