Six Ways to Improve Profitability

Increase profitability

Increasing profitability is a key goal for many small-business owners. Here are six cost-effective tactics that could, if implemented properly, help you save money and intensify profits.

1. Control expenses. The advantage of controlling expenses is that for every dollar you save by eliminating an expense, you gain an extra dollar in profits. One way to be conscious of cash flow is to use the zero-based budgeting system.

Zero-based budgeting requires you to begin each year’s annual budget process by setting each category to zero. This approach allows you to see every dollar that goes into the business bank account and decide whether spending that dollar is necessary. Try the approach first with last year’s budget. Once you’ve assessed last year’s budget, it should be easier to decrease expenses.

2. Increase margins. A margin is the difference between the sales price of a good or service and the price the business owner paid to attain that product or service. A small-business owner can increase his margins by raising prices, lowering the costs of goods or services sold, or both.

  • If you are reluctant to raise prices, keep in mind that customers generally tolerate price increases as long as the increases are competitive with those of other retailers and products. You also want to maintain quality relationships with your customers.
  • Review the margins on all products and services sold at least once a year. After you review the margins, pick an optimal time to raise your prices. You may consider a price increase when your product or service is in higher demand. When you are calculating the amount of the price increase, do not use an across-the-board percent increase system. Instead, analyze the percent of price increase on each individual item. Also, consider higher margins for lower-priced products and products for which comparison shopping is less common.

3. Reduce marketing costs. Invest in methods proven to increase profits, and stop using methods that show minimal results. There are two cost-efficient ways to do this:

  • Keep in touch with your customers through email instead of post mail.
  • Use social media as a way of contact.

4. Manage your inventory. Stay abreast of which products are selling and which aren’t by monitoring your inventory. Based on that knowledge, determine if you are purchasing too few of the top-selling items or too many of the worst-selling items. Adjust accordingly. You will end up meeting customers’ needs and saving money.

5. Develop a database. It’s crucial to keep track of customer purchases, because 20 percent of customers will generate 80 percent of sales. It’s quick and simple to create a customer database.

There are two ways to keep track of customers, what they purchase, and how much they spend:

  • If you use credit-card processors in your business, you can store customer information automatically.
  • If you accept cash but not credit cards, you can train your employees to ask for customer information at the point of purchase.

With information from a customer database, you can offer top customers promotions or create a referral system where existing customers are rewarded for sending new customers your way. Now you can keep track of customer purchases, maintain quality customer relationships, and increase profits by obtaining new customers through old ones.

6. Seek add-on sales. When a customer purchases something from you, offer a free sample item that will enhance the value of the original purchase. A free sample may encourage your customer to buy more or refer other customers to you.

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