Running a small business can be both exciting and challenging. At the core of every business, the goal is simple: to generate profit. But as many business owners know, consistently growing that profit is often easier said than done. Let’s dive into your business and discuss strategies that can put more cash back in your bank account.
Words to know before we get started:
- Income: Cash that is brought into your business whether by providing a service or selling an item(s).
- Expenses: Payments for ordinary and necessary services or materials used to run your business.
- Profit: Money that is left over at the end of the month once all income is accounted for and all expenses are paid.
Analyze Your Spending
This sounds like a no-brainer, but this initial step can change the whole trajectory of your business. Here is what you are going to do: sit down with at least 3 months of bank statements or transactions (notice I did not say financial statements) and an excel or google sheet (whatever is your preference). You can click this link to grab the sheet I have created, feel free to edit categories or add as needed! I want you to review each transaction, determining which, if any, are recurring. Any recurring expenses that can be deactivated due to inactivity, get those canceled! $9-$14 doesn’t sound like a lot each month, but over the course of a year those savings will add up! For the remainder of the expenses, upload the transactions pulled from your banking website into the spreadsheet. Begin to categorize each transaction, and understand your full financial picture.
You may be saying, “Lexi, I don’t have time for this!” and to that, here is my rebuttal: Make time. Plain and simple.
If you are serious about the financial health of your business, this will be important to you. Whether you are trying to save your business on the verge of closing its doors or brainstorming how to grow, this step is crucial.
Deep dive into your spending
Once you have all transactions reviewed and categorized, you should have a clearer understanding of where your money is going. You may be thinking, “wow, I used meals an awful lot over the last 3 months.” This is good. Often this is the wake up call we need to reform our current spending habits. Move over to the summary tab on your spreadsheet. Here is where you can see the total spent for each category. Here is where the questions can begin to flow: (1) Are you spending too much in any given category? (2) Could you negotiate with vendors to decrease costs, maybe on volume? (3) What expenses can I reduce and see little to no change in business as usual?
Some costs you won’t be able to reduce, and that is okay. Keep a pulse on them and review ever so often. These categories include things like payroll, materials, and technology. Just make sure that if these costs are increasing, so should your revenue.
Increase Revenue
After a full review of your expenses, you may still be coming up short. If cutting unnecessary expenses still leaves you in the red, the next step is to look at income. While expenses can normally produce a quick return, income sometimes tends to take a bit longer to see results. Here are some ways to increase your income:
Create a new product or service to sell to existing customers. Your current customers should already trust you, so this should be the path with least resistance.
Review your current offers or items and make sure they are at market price. Depending on contracts, this can be a quick way to increase your profit. If you have not reviewed your pricing in a while, I highly recommend taking the time to complete market research and ensure you are getting fair compensation for the services provided.
Introduce a new revenue stream into your business. This could be affiliate marketing, a course, a membership, or 1-on-1 coaching.
Monitor your metrics
The financial landscape of your business is an ever-changing system. You should, at minimum, be reviewing reports provided by your bookkeeper on a monthly or quarterly basis. In your cash crunching era, here are some metrics to watch:
Gross profit margin: This tells you directly how much revenue you have left after deducting the cost associated with your offer (COGS). For example, if you are a Plummer your COGS would be the pipe + materials immediately associated with your work performed. If your gross profit margin is consistently low, it could mean that you are under charging for your services.
Net Profit margin: This number is what is left over after all expenses have been deducted from your revenue. If this number is low or even negative, it could mean that your overhead costs are too high. Another example using that same Plummer, if the Plummer is seeing a low net profit he could be spending too much on rent, using too much fuel to get to jobs, or something else.
Understanding your numbers
It is worth noting that sometimes you may have a net loss in any given month and that is okay as long as it is not recurring. Using Mr. Plummer man again, if he purchases an annual subscription to his CRM in July, his July numbers may show lower than normal months or even a loss, but as long as his overall cash flow is positive, it is okay. Knowing this, I try to always look at the big picture, but also pinpoint why those negative months are there and discover what is causing them.
Business finances are not scary and they don’t have to be hard. Employing an accounting system can save you time, and a bookkeeper can help pinpoint areas to help save on expenses or help create a roadmap to increasing your revenue. Continually reviewing your business’ financial position will lead you to a greater understanding of your position and expose potential savings. If you are in the weeds of increasing profit, know that you are not alone! I hope that these tips were helpful, and you are able to grow + increase your small business profit.
No matter what your goals are for your small business, ensuring you have the cash flow available is crucial. Remember: consistent small savings can add up to significant gains over time.
Want to dive a step further into your business profits? Click here to get access to my Path to Profit workbook where we walk step-by-step together for 5 days and increase your profit + outline your small business goals!