Are you ready to make more money in your business? Who isn’t? Even if you are running a nonprofit or government agency, you’re always looking at improving your profit margins. Your margins tell you how much is left over after you’ve paid your direct expenses. So what’s the secret to making more money? Stop doing things that lose money. Now, before you roll your eyes, don’t overlook the simplicity of this statement.
Reality is that we are creatures of habit, not logic. We do things the way we’ve always done them because we’re attached to our ways. Not to mention, everyone gets caught up in their ego now and again.
Here’s a classic example: A mid-sized business-to-business software company realized that every dollar of revenue generated from its marketing campaigns cost the business about $1.20. Result: The new business is costing more than it is worth ($1.00 – $1.20). Why didn’t they see this before launching the campaign? Because most of the time businesses don’t attribute marketing dollars directly to the sales generated. Taking the time to run the numbers can illuminate where your margins are positive and negative. Ready for some ideas on how to improve your margins?
Identifying cash creators Let’s first look at some ways to free up or create cash. There are plenty more out there, but here is a quick hit list:
- Do an expense shakedown. Take time at least once a year to scrutinize each and every company expense. Remember old habits die hard. Evaluate your travel expenses, telecommunication expenses, insurance costs, any and all subscriptions and so on. If the expense doesn’t contribute to your company’s profitability, eliminate it. You’re just about guaranteed to find areas in which costs could be reduced or cut out entirely. That’s why an expense shakedown is classified as a cash creator.
- Clip coupons. Not exactly “coupons,” but find good deals on business services. Everyone from Costco to Microsoft is falling over themselves to reach out to the small- to mid-sized business market. Make them win your business by comparison shopping. This is a great idea when it comes to telephone or cellular phone plans, suppliers, or even interest rates on company credit cards.
- Increase your prices. Not everyone can do this. But if you can back up your price increase by better products, service, and quality, then you are likely to keep all your customers. Most people are accustomed to the idea of getting what they pay for. (I have heard it said to increase your prices 10% per month until you lose 10% of your business. Interesting concept – it may have some value.)
- Be clear about your payment terms. From the get go, institute a consistent and firm payment process. Most customers will appreciate your professional approach if you make it clear exactly how you do business. The costs of having customers who pay late are significant, not only on the cash side, but also time spent on collections.
- Ask for more business. Do your current and past clients know about all of the services you offer? Not only should you educate your customers on an annual basis about what you offer, also ask for more business. Chances are you’ll get it
Detecting cash drains No one likes throwing money away. But in organizations, it can be hard to pinpoint when money is going down the drain. Here a few ideas on how to detect cash drains and improve your margins:
- Fire “loser” customers. Remember you are in business to make money. Customers that are costing you money need to be evaluated. The reality is that some customers aren’t worth having, even though you spent time and money getting them. Customers who take up too much of your time compared with the profits they generate, who consistently fail to pay on time, and/or who always want more but don’t want to pay more are all cash drains.
- Eliminate “loser” products or services. Without a doubt, every company has one or more products or services that are losing money. You might be an exception to the rule; however, this tends to happen more often than not. The big issues – most businesses don’t know which ones are winners and which are losers. Why? The primary reason is the monthly financial reports are consolidated and will not shed light on how each product in your portfolio is performing. Determine your gross profit on each of your products and services to make sure you are selling them for less than they cost to produce.
- Market wisely. Both traditional and nontraditional marketing is expensive. Whether you are spending money on a TV campaign or paying your employee’s salary while she attends a networking event, you need to make sure your marketing dollars are well spent. With marketing dollars, you need a tangible ROI (return-on-investment). If your marketing strategy can’t justify its cost, replace it with something better or stop what you’re doing and save the money until you can figure out a better solution.
- Break even. Another common cash drain for service firms is inadvertently charging a lower billable rate than your hourly “breakeven” rate. The breakeven rate defined here is the cost per hour to keep your doors open. If you are selling your time, which is your inventory, for less than your cost of overhead, you have a negative profit margin. Now, in a perfect world, all clients should be profitable. Since that is rarely the case, work on getting the ones that are not profitable at least to breakeven.
- Keep a “Because it’s done that way” list. Do you ever wonder why you do something a certain way? If the answer is, “Because we’ve always done it that way,” you may have found a time-and-money-waster in your business. One of the biggest culprits – producing reports. Check to make sure the reports you produce are actually being used. Look for other areas where changes can be made or that can be completely eliminated in order to save money.
Erica Olsen (Erica@onstrategyhq.com) is a principal of OnStrategy, making strategy a reality for entrepreneurial-spirited organizations. Her company runs OnStrategy.com, a web-based strategic planning site for small and medium businesses. She is also the author of the upcoming book Strategic Planning For Dummies.