The fundamental rule of doing business in a capitalist economy is that if you do not earn, you cannot survive. It sounds harsh but the truth is always like that. In a small business, this law receives even more radical forms. The competition is high and resources for further development are often planned to be taken from the income received.
Many entrepreneurs are asking the question “Why are my income indicators higher than those of competitors, but less profit?”. These experiences are quite reasonable because it is the size of the profit that allows you to determine the profitability of the enterprise.
A common mistake that small business owners make in this case is to work only on increasing sales but in fact, profit growth is achieved in two ways that inevitably go together. There are an increase in revenue (sales) and a reduction in costs. Let’s look at three strategies to achieve this.
1. Direct Cost Reduction
Direct costs are the costs that are directly indicated in the statements of profit. They are “tangible” and the entrepreneur is able to relatively accurately assess their size. Direct costs include the salary for employees, rent, expenses for the purchase of equipment, raw materials, or goods.
The first way to reduce direct costs is to reduce the cost of the goods you sell. To do this, it is worth negotiating with your suppliers. Long-term cooperation with you is no less beneficial for them than for you. Therefore, if your suppliers want to keep it, they will go for a moderate price reduction so that your profit helps you continue to work.
The second way to reduce direct costs is to reduce production inventory or to provide “control over the state of stocks”. Careful attitude to inventory and tracking of its stocks will increase your profit. Some small business owners purchase inventory arbitrarily, without using data on its accounting. This leads to wasteful spending on the purchase of excess equipment.
A third way to reduce direct costs is to reduce your operational resources. Many entrepreneurs ignore these costs, believing that they are insignificant. But the truth is that optimizing the costs of telephony, web hosting, electricity, and even office paper can increase profit margins imperceptibly for you.
2. Lower Indirect Costs
Although indirect costs, as the name suggests, are difficult to track, they also damage your profit. These costs are less obvious and may even be unconscious at first but they have a strong influence on the performance of the final reports. The following example will help to more clearly explain what indirect costs are.
A bakery produces a certain number of products every day. All the pastries that remain at the end of the working day can no longer be put up for sale tomorrow but are written-off. The costs of writing-off this product are considered indirect and are part of the total cost of producing the goods. Nevertheless, they can be reduced, which will increase profits subsequently.
In the case of a bakery, it is necessary to track the average number of products sold per day and, in accordance with this number, form a daily assortment. The more accurately you determine this indicator, the less baking will have to be written-off at the end of the day.
3. Profit Analysis
The available income data should be used not only to understand how reach you become and tax preparation but first of all for analysis in order to further optimize the cash flow. Analysis of income and expenses allows the entrepreneur to understand what aspects of work require changes to a greater or lesser extent.
If you sell a product with a high price markup, one unit of which allows you to make good profits, then you should focus on increasing the number of sales, including additional motivation for employees. If your product has a low retail price but is sold in large quantities, then you should consider reducing its cost to get more profit. This can be both a reduction in production costs and a decrease in logistics costs.