Increasing your profits might sound like it’s an unattainable dream just out of your reach. But there are a finite number of ways that profits can be increased. Once you understand what they are, you’ll have clarity on how to best reach your goals.
There are two primary ways to increase profits:
- Raise revenue
- Lower expenses
That’s not particularly enlightening or instructional, is it? Let’s look at the four ways you can increase revenues and the four ways you can reduce expenses to get clearer on what actions we can take.
Four Ways to Increase Revenue
1. Raise prices
The easiest way to raise revenue is to simply raise prices. However, this is not foolproof and assumes you’ll be able to maintain the volume of sales you’ve achieved in the past.
This method is also limited by market demand, what your customers are willing to pay.
2. Add new customers
Adding new customers is what most entrepreneurs think about when raising revenue. Increasing your marketing or adding new marketing methods is typically the way to add new customers.
Another related option is to work hard to keep the customers you already have. You can also potentially contact the customers you lost and ask them to come back.
3. Introduce new products or services
For some companies, your products and services are changing every year. For others, not so much. To increase revenue, consider adding new products or services that will bring in an additional revenue stream that you didn’t have before.
Even if your products are changing every year, you can consider adding something completely different that your customer base would love. For example, a hair salon could add a nail desk, a clothing store could add handbags or shoes, a grocery store could add a coffee bar, a restaurant could add catering, a landscaper could add hardscaping, and so on.
The final way a business can increase revenue is to acquire another business in a merger or acquisition.
Four Ways to Reduce Expenses
1. Negotiate for a better deal with vendors
If you’ve been working with a vendor for a while, you may be able to re-negotiate your contract with them. This is especially common with telecom companies. Call your phone provider and ask them for the latest deal. They always favor new customers over long term customers, but they don’t want to lose customers either. Just calling them usually yields a better price than what you are paying now.
2. Change vendors
If a vendor has gotten too expensive, it might be time to look for a new vendor. Health care insurance seems to be in this category. Often, changing providers will lower your costs.
3. Cut headcount
If there is not enough work to support your employees or not enough cash flow to pay them, then it might be time for a layoff or restructuring. You might also consider outsourcing a function that you previously did in-house.
4. Cut the expense or reduce services
It might be your business no longer needs to spend money on an expense. Perhaps this expense has been automated. In this case, it’s an easy decision to cut the expense out entirely.
Those are the eight ways to increase profits. Which one makes the most sense in your business? Create a plan around these eight ideas to boost your profit in 2017, and let us know if we can help.
Are you ready for 2017 to be even better than 2016? If so, take a few minutes to reflect on the questions below and take action to set your 2017 profit plan.
Question 1: What were the three best business things about 2016?
No need to re-invent the wheel. If you knocked it out of the park in 2016, can you wash, rinse and repeat these tasks in 2017?
If you’re having trouble thinking of three things, here are some hints:
- What apps saved you time and money?
- Did you make some good hires?
- Did you let go of a bad hire or two?
- Was there a marketing campaign that really worked?
- Were there any events you went to that generated great ideas?
- Did you add or remove products and/or services?
- Did you buy new equipment or open a new location?
Summarize the three best things that happened in your business for 2016 and think about how you can repeat them to enhance your 2017.
Question 2: What were the three worst business things about 2016?
While we don’t want to dwell too much on our failures, we do want to learn from them. Think about the three things that are causing you to lose time, money or gain stress, and decide if you can make changes for 2017.
Question 3: What vision do you have for your business in 2017?
At the end of 2017, what has to have happened in order for you to have a successful year? Think in terms of metrics as well as intangibles, such as peace of mind and happiness.
Once you know your destination, the fun is in creating a roadmap to get you there.
Your 2017 Profit Plan
If your vision includes financial goals, then creating a profit plan is one way to measure your progress throughout 2017. Start by deciding how much profit you want to make in 2017. From there, you can compute your revenue goal and make a plan. Then you can add expenses to complete the budget. Here’s an example:
Let’s say you want to make $50,000 in profit for 2017. You can do that in a number of ways:
- Generate $500,000 in revenue and $450,000 in expenses.
- Generate $2 million in revenue and $1,950,000 in expenses.
- Generate $150,000 in revenue and $100,000 in expenses.
- And so forth.
From your profit number, you can create a revenue plan. A revenue should include how many items you need to sell. Like this:
|No. of units||Price||Revenue|
Once you have your revenue plan, you can fill in your estimated expenses.
You might be thinking that this sure sounds a lot like making a budget. And it is. But it’s far more fun to work on something called a profit plan than it is a budget. And if you need us to do the number-crunching part, please feel free to reach out any time.
Here’s to a very happy and prosperous 2017.
As a business owner, you’re likely torn in a hundred different directions every day. It can take up most of the work day just fighting fires, serving your customers, and answering employee questions – never mind the time spent on email. It’s super-easy to lose sight of what you can be doing to move your business forward the most.
That’s when “the one question” can come in handy. It’s something you can ask yourself at the very beginning of each day, even before you check your email. Make your question about you and your goals for your company.
The one question is, “What’s the highest payback thing I can do today?”
If your goal is to boost profits, then ask “What’s the highest payback thing I can do today that will boost my profits?” If your goal is to empower your employees, then ask “What’s the highest payback thing I can do today that will empower my employees?” If your goal is to make a difference in your community, then ask “What’s the highest payback thing I can do today to make a difference in my community?” If your goal is something else, tailor your one question to that specific goal.
It’s not about fighting fires or answering routine employee questions or even serving current customers. Although those tasks are all important and essential, none of them will take your business to the next level.
It could be meeting with a power partner or referral source that sends you a lot of business, designing the next campaign that will bring in a higher level customer, meeting with your employees for lunch, or researching new products to sell. It’s going to be a task that gets you working “on” your business instead of “in” your business.
If you like this idea, consider writing the question on a sticky note and posting it to your bulletin board so that you can see it every day. I write my question and my intentions each morning on a colorful piece of paper that I carry with me all day. I do this while having my coffee and long before I check an email, text or telephone message.
Try asking yourself this one question each day: “What’s the highest payback thing I can do today?” Then do it, and watch your business grow.
As we move into the fall season and the final quarter of the year, it’s a perfect time to commit to a project in your business that will help you reach the year’s end in better shape. Here are five ideas:
1. Back-to-School Time
If payroll expenses are one of the higher costs in your business, then it makes sense to boost your team’s productivity and maybe also your own. Fall is back-to-school time anyway, so it’s a natural time of the year to take on a course, read a business book, or hire an organizer to help you get more from your workspace.
If you spend a lot of time doing email, consider taking a course on Microsoft Outlook® or even Windows; learning a few new keystrokes could save you tons of time. If you need more time, look for a book or course on time management. Look for classes at your local community college or adult education center.
2. A Garage Sale for Your Business
Do you have inventory in your business? If so, take a look at which items are slower-moving and clear them out in a big sale. We can help you figure out what’s moving slowly, and you might even save on taxes too.
3. Celebrate Your Results
Take a checkpoint to see how your revenue and income are running compared to last year at this time. Is it time for a celebration, or is it time to hunker down and bring in some more sales before winter? With one more quarter to go, you have time to make any strategy corrections you need to at this time. Let us know if we can pull a report that shows your year-on-year financial comparison.
4. Get Ready for Year’s End
Avoid the time pressure of year’s end by getting ready early. Review your balance sheet to make sure your account balances are correct for all transactions entered to date. You will be ahead of the game by getting the bulk of the year reviewed and out of the way early.
Also make sure you have the required documentation you need from vendors and customers. One example is contract labor that you will need to issue a 1099 for; make sure you have a W-9 on file for them. If we can help you get ready for year-end, let us know.
5. Margin Mastery
If your business has multiple products and services, there may be some that are far more profitable than others. Breaking these numbers out to calculate your profit margins or contribution margins by product or service line can help you see the areas that are adding the most income to your bottom line. Correspondingly, you can determine if you have any items that are losing money; knowing will help you take the right action in your business. Refresh your financials this fall with your favorite idea of these five, or come up with your own fall project to rejuvenate your business.
Some numbers need reviewing on a daily basis, and one example of this is cash. When cash is coming in from a number of places, it’s great to have a daily summary of what was collected.
It’s also great to make sure all the collections hit your bank account so you can feel confident that no errors were made along the way. A daily cash reconciliation report will serve both needs very well.
A daily cash report will vary depending on the type of business you have, but it will look like a combination of a bank reconciliation and a sales report wrapped into one.
If you are managing your cash closely from day to day, then this report will help you stay sane. You’ll need two very brief spreadsheets to get started. The first one below is your daily sales from all sources. Your accounting system may be able to generate this.
|Total Bank Deposit||$900.00|
|Total Credit Card Due||$600.00|
If your accounting system is up to date, all you’ll need to do is pull the cash balance and adjust for today’s activity. The following day, you can double check your accuracy and adjust accordingly using the last two rows.
|Daily Cash Report|
|Book Cash Balance||$5,000.00|
|Deposit from Today’s Sales||$900.00|
|Less Checks Written Today||($1,200.00)|
|Expected Bank Balance Tomorrow||$8,300.00|
|Actual Bank Balance||$8,300.00|
|Explain any differences|
If your accounting system is not updated in real time, you’ll need to start with the bank balance and correct it for uncleared transactions as well as list today’s activity.
|Daily Cash Report|
|Deposit from Today’s Sales||$900.00|
|Less Checks Written Today||($1,200.00)|
|Checks Still Outstanding||($3,000.00)|
|Deposit from A/R Paid||$5,000.00|
|Expected Bank Balance Tomorrow||$8,300.00|
Using these formats, you can easily extend them to cover the entire week. This way, you’ll know what your cash balance will be from day to day.
If you see the value of this report for your business and would like help creating it, please reach out.
Wow, can you believe that 2015 is half over already? Now that we’ve crossed the halfway mark, it’s time to see if we’re on track for our 2015 goals. To do that, we need to see if we’ve met our mid-year milestones.
Managing By Milestones
A milestone, in project management terms, is simply a point along a project timeline. It’s marked so that project managers recognize when that portion of the project has been completed. We can use milestones to see how we’re faring toward financial goals as well.
Assuming our business is not seasonal, we should have earned half of our target revenues for 2015 as of the June 30, 2015 income statement. If we’re falling short, we can recognize that and perhaps add some promotions or sales to spike revenues so that we can correct the shortfall before the year has ended. If we’re ahead of the game, we can see what is working so well and make sure to replicate it.
Either way, with milestones, we can be more proactive in reaching or surpassing our goals.
By the Numbers
Some of the numbers you may want to set milestones for include:
* Revenue to date
* Profit to date
* Debt paid down or debt taken on
* Assets acquired or sold
* Number of employees added or lost or both
* Number of clients added or lost or both
* Accounts receivable aging
Milestones don’t have to be numeric. You can also use them to determine if you’re on track with internal projects. Perhaps for 2015, your goal was to replace 5 PCs and convert your shopping cart software. You can set milestones to monitor specific phases of these projects or just monitor when you start and complete them.
Mid-Year Milestone Report
Document your accomplishments in a mid-year milestones report. It feels good to write them down, plus you’ll have a history of how much you accomplished as well as what worked.
The report can include the milestones as well as a narrative explaining the performance to date. If you’d like our help creating this report, please feel free to contact us.
Accounting for milestones can help you become more proactive toward reaching your business goals. Plus, it’s great to see how far you’ve come since the beginning of the year.
As always if you have any questions regarding any of our newsletters, please feel free to call for further clarification.
A great way to speed up your cash flow is to get paid faster by customers who owe you money. One way to do that is to examine your payment terms to see if you can accelerate them. First let’s talk about what payment terms are common. Then I’ll share a study that showed which payment terms generate the fastest payments.
Traditional payment terms are spoken in the following format:
Percentage discount/(Days due from invoice date), “Net” (Days due before payment is past due)
An example is 2/10, Net 30. It means to the customer that if they pay within ten days, they can take two percent off of the invoice due amount. If they don’t want to do that, they need to pay the full invoice within 30 days of the invoice date.
You could write “2/10, Net 30” on your invoice, but you will get paid faster if you write it out in plain English.
If your industry “has always done it that way,” I encourage you to challenge the status quo. Getting your cash faster is important to all small businesses, so don’t let your industry hold you back.
Most corporations are required to take discounts if they are offered, so offering an early pay discount might help you get paid faster.
There are several studies on how to get paid the fastest. Of course they all have different conclusions! FreshBooks advises that “due upon receipt” terms can work against you as most people decide that that can mean anything. They suggest using wording that says “Please pay this invoice within 21 days of receiving it.” Here is their blog post on the topic:
Xero produced a page on the topic as well. Their research suggests that debtors pay bills 2 weeks late on average. They also suggest using terms of net 13 or less in order to get paid within 30 days. Here is their page on the topic:
Feel free to contact us if you’d like help deciding on payment terms for your business.
Many businesses operate with seasonal peaks and valleys. Retail stores flourish in their busy holiday season. Construction contractors are busy when the weather is good. Accountants are very busy from January through April, but also experience a quarterly peak in July and October.
Your business many have its own calendar of busy and slow times. If your business goes through slow times, then your cash flow may suffer at certain times of the year. But having seasonal sales is only one of the reasons for a bumpy cash flow.
You might also have a business where annual payments are made for many items such as equipment purchases, software licenses, insurance renewals, and other large costs. On the revenue side, it could be that your clients pay you annually, which can be hard to predict.
There are many solutions that can help to smooth out the seasonal bumps, and here are a few ideas for your consideration.
Plan for Prosperity
When income and expenses go up and down and up and down, it’s really hard to know if you have enough money for obligations coming up. Creating a budget can help a great deal. Consider creating two budgets: one that shows the ups and downs and one that averages a year’s income and expenses into twelve equal parts.
With both budgets, you’ll be able to see which months will be deviating from average and by how much. From there, it’s easy to create some forecasts so you can stay on top of your cash requirements.
Cash vs. Accrual Basis
It might help your business decision-making to convert your books from cash basis to accrual basis. This is a huge decision that should be made with an accounting and tax expert, as there are plenty of ramifications to discuss.
In some cases, the accrual basis of accounting will help keep those annual payments from sneaking up on you as 1/12 of the payment can be accrued on a monthly basis to a payables account. This also keeps your net income figure steadier from month to month.
If your clients prepay their accounts on a yearly basis, you can book the income monthly and keep the difference in a Prepaid account. This spreads your revenues out and recognizes them over time.
If you feel accrual basis accounting is a little too much of a commitment, your accountant can still work with you to help you avoid the impulse of spending too much during the cash-rich busy season. Perhaps the excess cash can be put into a savings account until it’s needed. You can draw out 1/12 each month as you need it. A little planning such as the above suggested forecasts will help you determine how much you can take out each month. You can even name the Savings account “Do Not Spend!” or “Save for a Rainy Day.”
If it’s just too tempting to have all that excess cash building up in the good times of the year, try one of the ideas above to take back cash flow control and smooth out those bumps.