How Small Businesses Can Increase Profits
4 min read

How Small Businesses Can Increase Profits

Small business owners are busy with customers and staff. Here's a simple reminder that there are just 7 drivers of profit you need to focus on.
How Small Businesses Can Increase Profits

People tend towards overcomplicating things. To show how simple it can be, I want to demonstrate that at the end of the day, there are only seven ways to improve cash profits and returns at a small business.

Let’s jump right to it.

Increase price

You can increase the price of your goods and services.

There are only a few ways to pull the price lever. For example, you can change prices or find ways to influence the sales mix (encourage customers to purchase higher-priced or more profitable items). While increasing prices is an impactful and often overlooked way to create more value, it is important that you get it right as customers do not look kindly on unwelcomed price increases.

Increase volume

You can sell more units of your goods and services at the same price.

This can be achieved through sales and marketing efforts to attract new customers, a focus on retaining existing customers or increasing the order value per customer. The trick here, especially when spending more on sales and marketing, is to make sure that any increase in volume remains profitable. For example, if the average profit per customer order is $100 then you don’t want to be spending $250 to acquire a customer just to increase volume.

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Reduce direct costs

You can pay less for raw materials and labor, or use less.

You can reduce direct costs, also known as Cost of Goods Sold, by lowering the price you pay for your raw materials and direct labor, or reducing the volume of materials and labor you use. I’ve found the key here is to make sure that reductions in direct costs don’t impact the product or service and customer experience. Otherwise you may unintentionally lower volume.

Reduce expenses

You can reduce your overheads or operating costs.

For most small businesses, this means taking a look at all the remaining expenses required to be in business and renegotiating your deal, changing suppliers or stop paying for things you don’t use or need. Includes items like property costs and leases, insurance, energy costs, and cleaning costs. Try to make sure you maintain the same quality and reliability from the new deal you negotiate or the new supplier you choose.

Improve accounts receivables

You can collect from your debtors faster.

When small businesses have an accounts receivable balance, it essentially means they are loaning money to customers. You have paid the costs to deliver the product or service already and are waiting to receive the money. By collecting accounts receivable faster you can put that money in the bank and earn interest on it (more profits) or use it to fund and grow your business (buy more goods to sell or spend on marketing). Often this means changing payment terms you offer, giving discounts for immediate payment or simply having a conversation with your debtors.

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Improve inventory

You can reduce the amount of stock you have on hand.

By practicing better inventory management, a small business can reduce the amount of stock it needs to keep on hand. This means funding requirements (and interest payments) are lower and the business is less likely to have write-offs of inventory. In this worst case, writing-off inventory is money lost and lower profits. By focusing on more profitable inventory that sells faster, small businesses can also increase profits.

Improve accounts payable

You can slow down payments to creditors.

This is very similar to the accounts receivable lever, just in reverse. If you can look to extend effective payment days then your suppliers are effectively funding your business, reducing financing costs and giving you more money to invest in growth. The trick here is to maintain good relationships with suppliers, especially with suppliers of key materials you need for your business.

The takeaway

One thing that stands out is that these levers are all interconnected. For example, increasing prices can lower volume. Increasing volume through marketing requires spending more on direct costs. As always in small business, it’s a balancing act.

So these are the seven areas a small business can focus on to increase cash profits and returns. If you can think of any other ways to improve cash profits and returns, then please let me know. Otherwise, I hope this quick post left you with some ideas for how you might increase profits at your small business.

Before you go...

We all know that small business is about doing the little things right.

The little optimisations, the high-impact tweaks and the 1% gains you can make to your business to make it a little better, a little more profitable and even a little bit more pleasant to run.

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