The thought of increasing profit margins might feel a little… overwhelming. Where do you even begin? What if you’re already behind? What if nothing has worked in the past?
Well, here’s the deal: No matter where you are at the moment, there are plenty of things that you can do right now to increase your profit margins. That includes living and thriving during a pandemic, even though that may seem impossible. As COVID-19 has rolled through and we’re navigating this new normal, many people have faced financial disruptions that are more challenging than they’d normally be. For many of us, that uncertainty has to do with how we are managing our money, which includes profitability. Although it may seem like an inopportune time to make changes to your business, these easy tips and tricks are as sound no matter the situation. Implementing a few or all of them can truly make a difference, you can bet your bottom dollar on that.
Back Up. What Are Profit Margins?
By definition, a profit margin is “the difference between the cost of buying or making something and the price at which it is sold.” In essence, it’s the amount of revenue from sales that exceed the costs of your business. When it comes to the bottom line, a company’s most important goal is to make money and ultimately keep it. Several factors contribute to the liquidity and efficiency of the company’s success, but we’ll stick to the basics. Knowing how to calculate and analyze your profit margins is a sure way to gain more insight into generating profit. This includes the three key ratios: gross profit margins, operating profit margins, and net profit margins, #OhMy!
Cashing In On The Types Of Profit Margins
Gross Profit Margins tell us how effectively your company is utilizing labor, supplies, and production. When your business has high gross margins, that means you’ll have money left over to spend on other business needs such as marketing or research and development.
Operating Profit Margins show how management can generate income from the operation of the business by comparing earnings before interest and taxes. When these profits are high, that means your business has a good grasp on costs, or your sales are increasing faster than your operating costs. Ka-Ching!
Net Profit Margins are generated after-tax earnings. These are earned from all phases of the business and compare net income with sales. Each of these types of profits are important to consider when you’re looking to grow your business. Although it may seem like a complicated process, you must make changes now… or you may be a day late and a dollar short on increasing your profit margins.
The roundup below isn’t meant to be completely comprehensive, but it’s a good start to taking financial inventory so that you can increase profit margins. The best part is that none of these are hard to do, I pinkie swear!
Remember, when it comes to profit margins, every business is different. It’ll vary from industry to industry, as well as from year to year. There are a ton of factors that go into growing your business, but we’ll stick to the steps that will get you more bang for your buck. Depending on your business, these can be slightly tweaked to cater to your company’s needs. These easy tips and tricks are seriously on the money. Let’s cash in now, shall we?
#1 Change Our Your Money Mindset On Profit Margins
At all costs, bring a mindful approach to increasing your profit margins. Our brains tell us stories that keep us playing small. Things like: We’re in a pandemic, it’s just not the right time.I don’t know when to start. Or, nothing’s going to make a difference no matter how hard I try. These limiting beliefs come from a place of fear, which ultimately results in negative growth.
Having an open approach to exploring new ideas can take you beyond your means. Make this as an opportunity to learn more about what your goals are—Hire more employees, increase marketing, offer more products, or have your business run self-sufficiently so you can escape to a private beach with a blended cocktail and a paper umbrella in it. There’s no wrong answer because the buck stops with you. But it all starts with the right mindset.
#2 Up The Ante To Increase Profit Margins
The easiest way to increase profit margins is to increase your pricing. Again, this might seem counterproductive since we are in a unique financial climate. However, you would be surprised to find many businesses are thriving. Increasing your pricing is hands down the easiest way to increase your profit margins. This is particularly true for those who have been running their business for an extended period. When most companies launch, they tend to keep their prices low to compete. Usually, they are desperate for sales and won’t sell at a premium price. Remember when we talked about playing small? It’s crucial to rethink your pricing model every few years so that your business grows. Know your worth, then add tax.
#3 Cut-rate The Waste To Increase Profit Margins
A penny saved is a penny earned. Make an effort to eliminate tasks, activities, supplies, contractors, etc. that don’t add value and increase profit margins. Evaluate the expenses that don’t benefit your bottom line, as well as your contractors and customers. This can include anything from the amount of paper used, shipping costs, workflow platforms, subscriptions, and more. Perhaps you can take a look at renegotiating with your landlord to reduce your lease rate. Get clear on your costs of inventory and make informed decisions on how to cut the waste. Explore what’s burning a hole in your pocket and make the necessary changes. If you waver on cutting a non-essential tool or employee, remember that you’ll have to work harder to bring in more customers to make up for keeping them.
#4 Do Away With Discounts To Increase Profit Margins
Everyone loves a good deal. However, when it comes to increasing your profit margins, you’ll want to do away with the discounts. This doesn’t mean you should never have a promotion or increase sales through a referral program, but providing discounts too often will not result in profit. What’s more, it can add to your expenses if you have to pay employees overtime. It makes more work for everyone, including you! Take inventory of whether or not your company is discounting products too frequently or if the discounted price is too low. Negotiate, get competitive on pricing, and only offer discounts when it makes “cents” to your growing business.
#5 Take Your Team To The Bank And Increase Profit Margins
Teamwork makes the dream work. Corny, I know, but it illustrates why employees can be your greatest asset to increasing profit margins. Reevaluate your workflows and systems to see if there is room for more efficiency. Are there opportunities to cut steps, reorder processes, or provide additional training? Many businesses tend to operate with too many managers and not enough employees. Review your administrative and operational staff’s progress. Most of the time, these roles can be streamlined to avoid paying overtime or cut altogether. Every member of your business should have a clear idea of how they can contribute to increasing profitability. Empower them to take the money and run.
#6 Get A Steal From Vendors To Increase Profit Margins
Developing a good rapport with vendors is a simple way to increase profit margins. Be sure to always negotiate for better discounts on bulk or on-going purchases. The more you save, the more money goes right back into your pocket. You can also address other terms with your vendors, including payments, wholesale pricing, reducing freight charges, as well as combining and consolidating your orders to reduce shipping fees. The more communication you have with your vendors, the more opportunities you’ll discover to receive discounts. They may also be able to make referrals to other vendors in their network that can benefit your business’s profit margins. It’s always a good idea to get more bang for your buck.
#7 Bet Your Bottom Dollar On New Products To Increase Profit Margins
Building your business as a brand is a great way to elevate your position within the market. This could be as easy as a website refresh, updated tagline, email marketing strategy, social media ads, partnerships, or occasional giveaways. People understand the power of their purchase, that’s why we are more likely to buy from a brand that aligns with our values. Connecting to those consumers and making them a lifelong buyer will definitely increase your profit margins.
With this in mind, adding new products to your portfolio is a sure way to extend the lifetime value of your customers. Perhaps there are products that complement what you already offer or explore options to open up to new categories. Also, consider ways to bundle your products or services so that you can increase the average amount of every sale. Explore opportunities for new systems that help customers purchase your products even easier. Make sure the customer experience is seamless, so they’ll be more inclined to come back. Expanding on your bread and butter can be easy money.
These simple tips and tricks are essential to increasing your profit margins and growing your business. People often wonder why this approach is more effective versus increasing your business’s revenue. The answer is easy: More revenue can put stress on your business when it’s not ready. When you try to increase revenue instead of profit, you may find yourself having to hire more people to fill in the gaps, purchase more software, or spend more on shipping.
At the end of the day, it comes down to maintaining detailed financial records to know exactly where your money is being made. This is the foundation of running a successful business. Having this data will empower you to make the right decisions to take your business to the next level.
Sometimes you just need to talk to a professional who can give you personalized advice. If you can’t seem to find ways to improve profit margins or simply have questions about what it’s costing you to do business, contact us. We know how to make your money work for you.