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5 Tips to Make Your Small Business More Profitable

A recent blog post in SmallBizTrends provided some sound, basic advice on how to increase profits for small business owners which also applies to founders and CEOs of startups.

Here is a summary and selected excerpts of the 5 tips in the post:

1. Use Good Resources

Usually, the 2 largest expense categories for a small business or startup are labor (employees) and equipment or inventory. Improving the productivity of both employees as well as equipment is critical to increasing profits over time.

“To operate a profitable small business, you have to constantly evaluate the productivity gains from people and resources…. Before buying equipment, inventory, or supplies, consider the direct or indirect impact the investment has on your bottom line.”

2. Set Monthly Sales Goals

Too many small businesses and startups don’t have the discipline to institute monthly sales goals.

“Putting hands to dirt to execute your weekly and monthly sales goals is an exercise that you want to start early. It is rare to find profits without hard work. If you always focus on monthly sales goals then you will focus on weekly sales objectives. By doing this on a regular basis you will always stay focused on marketing. Too often business owners focus on the job at hand and don’t fill their [sales] pipeline.”

3. Create Efficiency Gains

While the post gives examples of simple, low-impact ways to save costs (e.g., change your own light bulb), the real efficiency gains in a growing company will come from a deeper understanding and management of variable and fixed costs with the accompanying expense margins.

In finance and accounting terminology, it’s crucial for the CFO and CEO to understand what the financial and operating drivers for profit margins.

“Efficiency isn’t just about cost reduction, find ways to get the same or greater value with a lower investment.”

4. Increase Revenue via Repeat Sales

Small businesses and startups often chase new customer acquisition to the exclusion of all else in the pursuit of growth at all costs.

Many times, the most profitable way to grow a company is by understanding the relative profitability of different customer segments and investing in the most profitable customers.

“The key to optimizing your profits lies in your ability to increase your revenue at a higher ratio than your costs. In the short term, you need to generate the maximum value from each customer and upsell them additional products and services to get more business. By focusing on your customer experience that will lead to word of mouth referrals and repeat business. It’s much cheaper to keep a loyalty than to go out and secure a new one.”

5. Evaluate Pricing Strategy

One of the single, biggest decisions that drives the profits (or losses) of a small business or startup is pricing. Pricing strategies that are not carefully crafted with deep understanding of a company’s costs as well as the customer value provided are bound to hurt profitability.

“Evaluate your pricing strategies to enhance profits and make your small business more profitable. Make sure you evaluate all your hard and soft costs in your pricing model. Don’t undersell your products and services to drive a high-volume. Precise pricing attracts the right buyers who are willing to pay for quality. Regular discounting establishes a price orientation with buyers and minimizes gross margin.”

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