Improving Profit Margins
One way to measure the financial health of your business is to look at its profit margin. The profit margin shows how your company makes money. It’s a ratio that’s usually calculated by dividing business income by revenue. The most commonly referenced profit margin is the net profit margin, which shows how much a company brings in after expenses are subtracted from revenue. For example, a company with revenues of $1 million and expenses that total $750,000 would have a profit margin of 25%.
As you grow your business, one area to focus on is increasing its profit margin. A virtual CFO can help you determine what steps to take to boost your company’s profit margin and can help you understand what a healthy profit margin is for your business’ industry. Here are a few things you can to increase profit margins.
Your company’s expenses directly affect its profit margins. The lower your expenses, the higher your profits. Look for ways to cut costs if possible. You might start with your inventory. Could you try keep less stock on hand, so that you don’t have to invest so much upfront? Having less inventory can also help you save on storage, as you can either eliminate certain storage facilities or switch to smaller and less expensive spaces.
You might also consider switching vendors to lower costs or finding new suppliers who can deliver the same products to you for less.
Labor can also be a significant expense that eats into your profit margins. If you are paying a lot of overtime or if there are redundancies in your organization, finding ways to streamline the workflow can help trim your labor costs and increase efficiency.
While increasing the price of the products or services you offer isn’t always an effective way to improve profit margins, in many instances, it can be. If it has been some time since you took at a close look at what your company charges, it might be a good idea to work with a virtual CFO to see if your products or services are priced competitively. It might be that you’re not charging enough in comparison to other companies. It could also be the case that what you pay to produce your products or to provide your services makes up a sizable portion of the price you charge.
Along with, or instead of, increasing prices, you can improve profit margins by increasing sales. That can mean upselling, getting customers to buy more during a single transaction. For example, you can train your employees to recommend complementary products when a customer is making a purchase. A salesperson can recommend a special floor cleaner to a customer buying a mop or a customer service rep can suggest that a customer purchasing a television also buy the extended warranty. The more you sell in individual transactions, the lower your overhead, the faster you’ll move product and the more revenue your business will bring in.
Adjust Your Product Line or Service Offerings
When you take a look at the prices you charge for particular services, it can be useful to also look at the products or services you offer. There might be some that eat into your bottom line more than they should and could be cut away. For example, if there’s a product that’s expensive to produce and doesn’t sell well, it might be best to discontinue offering it. If you sell similar products, you might decide to eliminate the lower performing ones.
Curate Your Client List
While the common advice is to try to retain customers and clients, there are cases when letting people go can do more good than harm. Assess your clients and rate them in terms of profitability. There might be a few who require a significant investment of time and energy on your company’s part but who don’t end up delivering a lot in terms of income. Depending on the situation, it might be the case that some of your clients are actually costing your business money to work with, rather than increasing your profit.
The virtual CFOs at New Direction Capital can help you evaluate your company’s expenses, revenue, and clients to determine where you can make changes that improve your margins. Contact us to hire your virtual CFO today.