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INSIGHTS
5 Steps to Improving Profit Margin in your SME
Improving Profits for Your SME
Are you generating enough income to cover your expenses and sustain the lifestyle you envisioned entrepreneurship would provide? Although your business is gaining traction, acquiring customers, and receiving positive feedback on your product or service, you may find yourself barely making ends meet and unable to expand your business.
It is surprisingly easy for a business to generate cash flow yet still operate at a loss, indicating that more money is leaving the business than entering it. It’s a common predicament that starts with an unhealthy profit margin and is a tale as old as entrepreneurship!
Understanding The Jargon
Revenue represents the funds received from customers in exchange for products or services provided. Gross profit is the remaining amount from the selling price after deducting the costs incurred in manufacturing or purchasing the products or services. The net profit encompasses the cash remaining after subtracting the costs associated with the production or procurement of the sold products and all other business expenses.
A profit margin refers to the amount of profit earned from each sale. Typically presented as a percentage, this amount represents the portion of your sales price that constitutes pure profit, utilised for business gain or investment. A higher profit margin percentage directly correlates to a stronger bottom line. Conversely, a lower percentage puts you at risk of incurring losses in the face of unexpected expenses.
5 Steps for Profit Growth
Reduce expenses
If your business generates substantial revenue and your pricing aligns with the market, we encourage assessing your expenses and identifying areas where cost optimisation is possible. For instance, consider if a full-time employee could accomplish their tasks in fewer hours, explore cost-effective alternatives to expensive materials, evaluate the necessity of renting your current workspace and consider how you can leverage cost reductions through outsourcing non-core functions. This thorough expenditure analysis will help determine which expenses can be eliminated or reduced.
Increase prices
If you have set an inadequate price for your product or service, implementing a price increase could help drive profit. However, it can also deter even your most loyal customers. It is important to ensure that your prices remain competitive while providing additional value to your customers, thereby justifying increases.
Reassess your offering
Obsolete inventory that lacks demand holds no value, drains cash resources and can hinder the growth of your business. To address this, consider a clearance sale to make room for more profitable products. You can optimise your inventory management and maximise profits by redirecting your attention to your top-selling items, which generate the most revenue.
Negotiate settlement discounts
If you have a strong history and good professional relationships with your suppliers, it is worth exploring the potential for negotiating a discount. They may be receptive to this idea if you can make upfront payments or place bulk orders.
Improve production processes
To increase your annual turnover, selling more products or services is crucial. One effective strategy to support this goal is implementing a standardised approach to production or easily replicated services. This allows for streamlined production times and operational efficiencies, ultimately achieving improved profit. It also supports scalability and ensures your business meets growing demand while maintaining high-quality output.