9 ways to improve your business’s profit margin

April 10th, 2019

If you’re looking to improve your business’s profitability, exploring options to increase sales is a common place to start. However, it’s not always easy to significantly increase sales without investing in marketing and your sales team or reducing your prices.

Many small business owners have discovered that increasing their profit margin is a simpler way to improve overall profit in the short term. Widening the gap between the buy price and sale price of your products and services allows you to drive better profitability without making changes to your marketing spend, employee costs and overheads. You’ll be making more money even if don’t increase the number of sales you make.

Here are nine ways to improve your business’s profit margin and cash flow that you can start to implement today:

1. Understand your profit margins

You may know your overall gross profit margin, but do you understand the profit margin for each of your products or services? Use your accounting software or speak to your accountant about breaking down your gross profit margin by industry, product type and to an individual customer level. Once you have this information, you can identify products, services or customers where you’re making a low margin – or even a loss.

Having up-to-date information on your profit margins allows you to focus on the products or services that make you the most money. You can also easily benchmark your business against similar businesses or industry averages.

2. Review your prices

When’s the last time you reviewed your prices across the board? Do you price consistently, or do different customers pay varying amounts for your products or services? How does your pricing stack up compared with your competitors?

Reviewing your pricing is something you should do proactively on a regular basis. While you want to compete based on more than just price, if you’re not keeping pace with the market, it can have a serious impact on your cash flow and bottom line.

3. Cross-sell and upsell to existing customers

While it’s easier - and cheaper - to sell to an existing customer than to win a new customer, many small businesses don’t have a strategic approach to cross-selling and upselling to existing customers.

Consider creating product bundles where your main purchase from a particular customer is a low-margin product – by bundling this product with a higher-margin product, you can balance things out and increase your total sales. Look at complementary products that your customers are buying – are they something you can stock to deliver more value and become more of a one-stop-shop?

4. Negotiate with suppliers

Have you asked your suppliers for better pricing? If you’re purchasing regularly – and particularly if your orders with them are getting larger – it’s worth checking whether they’re able to provide a discount. Even a small percentage or dollar saving per item will have a tangible impact on your profit margins and cash flow by increasing the gap between your buy and sell prices.

5. Don’t compete on price

Competing purely on price is a risky play – it can often be a race to the bottom, where all players seriously erode their profit margins. Be clear on your value proposition or point of difference – what is it (aside from price) that makes customers choose you? Ask your customers why they deal with you – you may be surprised at some of their responses!

6. Consider a price increase

While implementing an across-the-board price rise is never easy, the reality is that the costs of running a business are always increasing. Loyal customers are unlikely to leave you because of a small price rise – particularly if you’ve done a good job communicating that value that you deliver to them – great service, the largest product range, fast delivery, etc.

7. Monitor supplier bills

When you’re busy, it’s easy to forget to check that your suppliers’ bills line up with what’s been provided - particularly when you’re dealing with a trusted supplier that you have a longstanding relationship with. However, mistakes happen, and it’s important to reconcile that the product or service you’re paying for has actually been supplied each time and that you’ve been charged at the right rate (that is, any bulk discounts or account credits have been applied).

8. Use an inventory management system

Keeping a close eye on your inventory is a simple way to improve your business’s profitability overall. If you don’t know how much stock you have on hand at any time, you’re guessing at when – and how much – to reorder, and you run the risk of accumulating obsolete stock that you’ll have to discount to sell or worse, pay to dispose of.

Most modern inventory management systems can integrate with your accounting software so that you have an up-to-date view of how much your stock on hand is worth, and how much you paid for each product – giving you an accurate view of your profit margins.

9. Restructure your financing

If you’re still financing your business the same way you did five or 10 years ago, chances are there’s a better option out there. Speak to your accountant about restructuring your business lending to save on interest and consider other forms of financing to boost your working capital and cash flow.

Many small businesses are embracing alternative funding solutions as a way to finance their growth – in fact, Australia is the second largest alternative finance market in the Asia Pacific, with USD$610 million raised in 2016.[1] Balance sheet lending, peer-to-peer lending, crowdfunding and invoice financing are becoming far more commonplace as business owners look for options other than the big banks.

If you’d like to explore alternative funding options for your business, get in touch with Earlypay. We offer a free, no-obligation phone consultation where we can recommend the most appropriate options for you. Call 1300 760 205 to book a consultation today.

[1] http://sjm.ministers.treasury.gov.au/media-release/092-2017/

If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].