How To Make A Good Revenue And Profit Margin For Your Small Business 💸
“How’s business going?” is a question that business owners should regularly ask to check on cash flow performance. For a small business, tracking financial records helps point out if there are cash-flow problems, what’s causing them, and more importantly, how to solve them. What should to solve cash flow problems and achieve a good profit margin for a small business?
Today, we look at the methods in solving cash-flow problems to drive growth as a small business. If your business is often playing catchup with payments, then you need to consider digging into what’s causing cash-flow leaks.
Cash flow is the amount of money flowing in and out of every transaction or process to keep the business operating. This includes all types of expenses, revenue, and profit. To sustain business growth and operation, you’ll want to keep a record of the business cash flow or you could end up closing down your business completely.
As a business, profit is anticipated to be flowing steadily, if not consistently. It’s important to determine what type of revenue stream your business belongs to – whether it is an all-year-round revenue stream or a seasonal business. This tells you when to expect your business to be in a surge or a declining period which leads you to prepare and designate the correct actions to be taken at this time.
Growth is every business’s long-term goal. Whether it is expanding into your third region or penetrating into a new market, it’s an exciting journey. But if you’re not careful, prepared, and calculating, the projection for growth opportunities can turn into a disaster. When a company is growing, growing pains often come with it too.
What does it mean to have a good profit margin for a small business?
The ideal profit margin goal varies depending on the specific industry of the business. In a broad sense, a healthy profit margin is typically regarded as being within the range of 7% to 10% or even higher.
A good profit margin for a small business means earning more money from sales than it costs to produce and operate. It reflects the business’s ability to generate profits efficiently. For example, if a small bakery sells cupcakes for $3 each and it costs them $1 to make each cupcake, they have a $2 profit per cupcake. A higher profit margin, like 50%, indicates the business is efficient in controlling costs and pricing its products competitively.
A strong profit margin allows a small business to reinvest in growth, pay off debts, or save for the future. It’s a crucial measure of financial health. In contrast, a low profit margin, such as 4%, might signal that a business is struggling to cover expenses and needs to reevaluate its pricing or cost-cutting strategies. Therefore, for small businesses, achieving and maintaining a good profit margin is essential for long-term success and sustainability.
What factors determine a good profit margin for a small business?
Three factors that determine a good profit margin for a small business are cost management, pricing strategy, and market competition.
1. Cost Management
Efficient cost management involves minimizing expenses while maintaining product or service quality. This includes controlling production costs, labour costs, and overhead expenses. For instance, a small clothing boutique must closely monitor its inventory levels to avoid overstocking on slow-selling items, which ties up capital.
Additionally, it may negotiate favourable terms with suppliers to secure discounts or reduce the cost of goods sold. Managing staff schedules effectively can also help control labour expenses. Rent or lease agreements should be negotiated to ensure the boutique is not overpaying for its location. All these efforts collectively contribute to a more favourable profit margin.
2. Pricing Strategy
Setting the right prices for products or services is a delicate balance. A small software company, for example, may decide to price its software higher if it offers unique features or advanced functionalities that are not readily available elsewhere in the market. Conversely, it may opt for a lower price to gain a competitive edge if there are many alternatives available to potential customers.
It’s crucial for businesses to understand their target market’s willingness to pay and align pricing strategies accordingly. Effective pricing can maximize revenue and, when combined with prudent cost management, result in a healthier profit margin.
3. Market Competition
Staying competitive in the market is essential for profitability. Small businesses should continually assess their competitors’ prices, offerings, and strategies. For instance, a local coffee shop may regularly check the prices of nearby cafes to ensure its menu items are competitively priced.
If a new competitor enters the market and offers similar products at a lower cost, the coffee shop may need to adjust its pricing or enhance its value proposition to maintain its customer base. Monitoring market dynamics and responding strategically to competitive pressures can safeguard a business’s profit margin.
Preventing Cash Flow Leaks To Achieve A Good Revenue And Profit Margin For Small Business
Today’s businesses are consistently finding ways to reduce costs in the workplace. But many find it hard to do this in a sustainable fashion. Did you know that 9 out of 10 cost reduction programmes actually fail to achieve their targets and the gains appear to be short-lived?
Creating a cost-aware culture is the objective of almost all companies that strive to respond to downward pressure on prices. This intensifies competition, pressure from shareholders, and the need for resources to fund growth.
The Need for a Cash-flow Forecast To Achieve Good Profit Margin For Small Business
A cash-flow forecast is essential for a small business to gain a good profit margin. This prepares a business to create a reasonable and achievable budget and know where to allocate its resources and funding. A cash-flow forecast helps you advance on a more predictable and specific footpath to prepare and mitigate insufficient funds. It supports in identifying areas or services where you could offset funding needs or shortages, and then make necessary adjustments along the way.
Growth has a way of absorbing cash. When a company wants to increase sales, it needs resources to make more money. Pricing leaders need to shift their focus to improving profitability and providing fuel for the pricing team. It is especially relevant to CEOs whose goal is to grow a company and create practical cash flow improvement strategies.
Here are some ways of solving cash-flow problems and gaining a good increase in profit margin for a small business:
1. Create a Budget Plan
When encountering a cash flow shortage, you should inspect your business plan, processes, operations, and track expenses. This could be due to an inadequate fund reserve or partial payments that you make. You need to find out why and whether it will be a recurring problem or not. Automated finance tracking tools are reliable in this aspect as they save time and prevent human errors.
Calculating job costing defines manufacturing and labour costs and is key to reviewing your business’s profit, loss statements and profit margins.
They must be based on different sectors within the company which includes jobs, clients, employees, events, marketing strategies, pricing products and services. Then, recognize which areas of your business are the most and least profitable. This will be useful when formulating your business plan to focus on services that generate profit, let go of clients who cost you money, optimise your pricing structure, and single out areas that affect operations.
2. Create Payment Plans for Your Customers
The quicker money begins flowing into your business, the sooner you can address cash flow problems. Here are some strategies to do that:
Create early bird promotional offers, freebies, or discounts and implement late fees to discourage customers from overdue invoices.
Ask new customers for a deposit or partial payment up-front, rather than billing the entire amount after services have been rendered or products have been delivered. Start sending your invoices early and take advantage of automated technology for payment reminders.
Accept online payments, credit cards, and other alternative payment channels. Did you know that 65% of customers shop elsewhere when a business has no online or credit card payment option?
Finally, offer and accept pre-orders for a product before its official release as this creates an exclusivity culture for customers. Most elite shoppers relish getting their hands on a product that isn’t widely available to the public yet. Their feedback can also shape future product improvements and upgrades.
3. Adjust your Pricing Plan
Examine if your items are priced either too low or too high. Employ pricing tactics that help influence customer buying decisions such as “reduced” pricing ($4.99 instead of $5) which guides shoppers to believe that they are saving money even if it were cents. Implementing other methods such as “buy 1 and get free item” or pricing similar items with minor differences in numbers have the same impact on buyer decisions.
For example, to sell a rather expensive item, place it next to a more expensively priced item. This is known as price anchoring. Common sense dictates that customers will choose the less expensive product. Read more about the Simple Tricks that We Can Learn from Major Tech Businesses.
4. Negotiate a Payment Plan for your Payables
If possible, delay cash flowing out of your company during a cash flow crisis. It will remove the pressure on your working capital. Be honest with your vendors to negotiate payments and inquire about delaying payments. Although some might be uncompromising, chances are vendors will be flexible and willing to work with you in a tight situation. You might likely be able to secure an arrangement that works for you such as adjusted deadlines from utility providers. This creates a temporary financial safety net to cover for the days when the business has no incoming cash flow.
Consider borrowing options from financial institutions as a backup plan. Cash flow shortages occur when more money flows out of your company than it is coming in. So, a way to bring more money into the business can come from a loan. But before you take on debt, be sure to know the interest rates and have exhausted all the other options. If your business has an intrinsic problem causing a cash flow crisis, then taking on debt will be temporary and may make the problem worse in the foreseeable future.
5. Keep a Record of Every Transaction
Track everything and keep records of receipts. When you audit your expenses routinely, it helps you recognize inconsistencies and where they come from. Once again, automated technology can relieve the dullness and make the task of filing records of expenses simpler. You should know that when a business grows, its expenses grow too. That may include an increase in manpower and services or materials upgrade including investment in technology, as needed. Overall, it’s important to take these steps one at a time.
6. Find Ways to Reduce Expenses
As a rule of thumb in business, you should always scrutinise money that leaves your bank account. But you will need to be especially frugal when spending during a cash flow crisis while prioritising your expenses at this point, such as buying supplies in bulk. Well-known businesses practice bulk buying because bulk prices are often slashed with huge discounts. So, eliminate all unnecessary expenses and focus on the costs that generate revenue and keep you operational.
In addition to cutting non-essential expenses, in a cash flow crisis, you can sell off non-essential business assets. Although it can be a temporary fix, selling equity also creates opportunities to bring in new business partners. Like debt, however, reassess which piece of ownership in your business should be sold to help solve a cash flow crisis. Be vigilant and specific about the profile of investors you’ll want to acquire just as much as you want to avoid any fraudulent activities. Above all, creating partnerships and alliances boosts brand recognition and awareness among the public.
Solving Cash-flow Problems And Earning A Good Profit Margin For Small Business
Start-ups and the development of new products often require a good amount of resources and leadership to support rapid growth and a steady foothold in the marketplace. With this, you must start the cash flow improvement strategies very early on.
Experiencing a cash flow shortage will push you to closely inspect your business plan, processes, operations and expenses. When your pricing strategy is not working, you need to determine the reasons behind it and employ a mix of essential pricing strategies. Assess if the cash-flow leak will be a recurring problem, then put a plan in place right away to handle future shortages.
Prevention is worth more than treatment in the long run. This also applies to financial strategies when taking steps to actively address cash flow leakage. Paying close attention to these issues and developing solutions to keep cash flowing into the business will ensure your brand both succeeds and grows past its fifth year. The quicker money begins flowing into your business, the sooner you can strategize to address and solve cash-flow problems in the future.
For a comprehensive view of ensuring the continuous growth of your business, Download a complimentary brochure on How To Drive Pricing Strategy To Accelerate Sales & EBIT Growth.
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