Businesses exist to make money. That’s not news right?
And, if a company does not generate sufficient profits it may fail. That’s not news either.
The margin between what businesses charge for their products or services and the cost to provide them has a huge impact on the success or failure of an enterprise. Charge too much and the business may lose customers, charge too little and profits will be too low for survival.
Even profitable businesses are not safe, they may fail if they cannot raise the finance to cover money tied up in outstanding invoices – and yet the cost of an overdraft or other form of finance may erode your margins. Furthermore, many traditional providers want to see profitability as a pre-requisite for providing finance in the first place.
Greg Charlwood, Managing Director at Bibby Financial Services Australia said, “In the current tough environment, we are advising our clients to give additional focus to maximising their profit margins.”
Mr Charlwood added, “Running your own business is one of the most exciting, challenging and rewarding things that you can ever do and requires motivation, entrepreneurial flair, determination and creativity. In order to be successful, it is vital that you know how much your product or service is worth and manage the fine balancing act between charging your customers the right prices and making enough profits to meet your revenue and profit targets.”
Business bankruptcies are on the rise, with ASIC statistics show that 1123 companies were placed into receivership in February 2012. This is the highest number on record since the statistics were introduced in 1999, with the majority of these being small businesses with fewer than 5 employees.
The Bibby Barometer Small Business Survey, published in April 2012, found that small business expectations for a healthy business environment had declined by 6% over the previous six months – based on intention to invest in the business, expectations of sales growth, ease of managing cash flow, business confidence and levels of business stress.
What can businesses do to get better profits?
In order to help business owners and managers strike the right balance and maximise profit margins, Bibby Financial Services has developed the following 11 top tips so you better pay attention now.
#1 Reduce operating costs. Look very closely at where your business spends money in producing its product or service, e.g. travel costs and stationery. Set up regular cost-reduction forums and consult with your staff on ideas. Are there any areas that can be cut back without having a negative effect on profits? The answer is always yes, you just need to look closely enough.
#2 Review your supplier base. Find out whether your business is paying for external suppliers to provide a service that could be carried out more cost effectively internally. You should also find ways of consolidating your suppliers in order to cut costs.
#3 Reduce cost of financing. Find ways to improve cash flow to reduce your cost of financing. Keep in mind that the longer debt remains outstanding, the longer it has to be financed through overdrafts or other mechanisms. You should also consider using debtor finance to reduce your accounts receivable cost and cost of finance. Debtor finance is designed to improve business cash flow and support business growth by releasing cash tied up in unpaid invoices. Unlike other funding arrangements, no real estate security is required, making it more accessible for small and medium sized business owners.
#4 Learn to negotiate. Remember that you are dealing with human beings!So, go ahead and talk to your key suppliers and ask about early settlement discounts or loyalty bonuses. According to the recent Bibby Barometer Small Business Survey, 45% of businesses surveyed offered this facility to customers with a discount in the range of 3-6% the most common. However, if you don’t ask, you don’t get it!
#5 Shop around. Desist from sticking to one supplier religiously. Research your supplier’s competitors and find out what prices they charge and what discounts they are prepared to offer. You will be surprised to find that there are much cheaper prices out there!
#6 Buy in bulk. Think about buying raw materials and supplies in bulk at a cheaper price per unit. Where possible, you could even pool resources or join a bulk-buying group with any other business owners to get even better discounts.
#7 Diversify your product range. Try to sell new lines to existing customers as well as attracting new ones by adding to your product range. Trim off your non-profitable products and focus all your energy on the profitable ones.
#8 Minimise the risk of bad debts. Bad debts erode hard-earned profits very quickly, so it is important to safe guard your business. Give yourself peace of mind by hiring a reputable business debt recovery agency to work on any delinquent debts.
#9 Know your worth. Yes, you probably think this is reserved for relationship advice articles. So, are you charging enough for your products or services? Review your pricing to ensure that you are keeping up with inflation and your competitors. Build value in the minds of your customers through marketing and promotional activity, and show other ways of using your product or how it will directly benefit the bottom lines of their clients or their businesses.
#10 Work smarter. It is not enough to simply work hard. Take time to investigate whether marketing or promotional funds can go further. Track the return you are getting on your activities. Are there complementary firms or organisations that you could pool marketing spend or resources with?
#11 Consider sales incentives. Look at ways to reward staff or customers who exceed sales targets or introduce new customers. Often internal sources will be the most cost-effective channels for new business.
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