In today’s post, I’ll be going over ways you can increase profit in your business.
Whether you’re new in your business or seasoned in the game, I’m pretty sure increasing your profits is something that you’re really interested in. You might even be obsessed with the idea.
And considering we’re already in the fourth quarter of the year, and you’re probably already looking for ways to boost profits before the year ends, or ways to increase profits in the New Year. Either way, I know this post is for you.
And just so we are really clear you understand the context of this post, you should understand three major concepts as it relates to profit.
Three Major Concepts Related to Profit
1. Profit is revenue minus expenses. Profit is not just total sales or revenue coming into your business.
2. Profit and profit margin are different. Profit margin is profit as a percentage of revenue. If you have a revenue of $10 and your profit is $3, then your profit margin is 30% (or 3 divided by 10).
3. There is no direct way to increase profit. Instead you can only improve the inputs that make a profit which are revenues and expenses.
Basically, you can increase your profit by either increasing revenues and/or decreasing expenses. I’ll be going over ways to both increase revenues and decrease expenses that will in turn boost your profits.
Also, keep in mind that every industry and business are different so what’s important is you consult your CPA for specific advice on your business.
Sounds good? Ok, let’s go!
How to Increase Profit in Your Business?
The very first thing that you need to do in order to increase your profit is bookkeeping.
You might be thinking, “Huh? Bookkeeping? How is that gonna help me increase my profit?” Well, how are you supposed to increase your profit if you don’t know where you stand today?
Think about it.
If you have a fitness goal to lose 15lbs., you would need to know what your weight is today in order to know if you’re losing weight. To learn this information, you would need to step on a scale and note your starting weight.
Same is true if you want to increase your profit.
You need to know how much profit you’re currently earning. The only way to know it is through bookkeeping.
We have plenty of other posts on how to get started with bookkeeping for your business so I won’t go too in depth there but just know you should organize all of your business income and expenses in a concise way that shows what your monthly profit is.
This will also give you insight on your sources of income and types of expenses you have which will be useful for my later tips.
So you have your books together, and you know what your monthly profit is, the next step is to create a business budget.
2. Create and Follow a Budget
Remember, to increase your profit, a key component is decreasing your expenses. You can do this by creating and following a budget. This will help prevent the mismanagement of incoming funds to your business.
Every dollar should have a clear destination meaning there should be a plan for every dollar your business earns.
The easiest way to do this is to allocate a percentage of revenue to each of your expense categories. For example, perhaps after reviewing your books, you realized that 10% of your revenue is used towards computer expenses, now ask yourself, is it possible to reduce this to 9 or 8 percent? Or maybe you’re spending 4% of revenue on IT, can this be reduced to 3%?
Do this exercise for each of your expense types and see where you can cut. Obviously some expenses are fixed like office rent but consider your other expenses and where cuts can be made.
Interestingly, you can do the same exercise backwards, meaning if you want to increase your profit margin 30%, then you know the sum of all of your allocated expense percentages should not be more than 70% of your revenue.
Here’s an example of a budget allocation resulting in a 30% profit margin.
|ACTIVITIES||% OF REVENUE ALLOCATION|
|Net Profit Margin
So you can see, by setting and following a budget based on actual financial information from your business, you can increase profit.
Ok, you now have a budget to cut expenses, but what can you do to increase your revenue?
3. Develop KPIs
To increase your revenue, you need to have a good understanding of where your current customers are coming from. Are they coming from word-of-mouth, website traffic or another source?
You need to know the answer to this question. If you’re just starting out, ask yourself:
- Where would your most ideal customer come from?
- Where are your competitors getting their customers from?
Assuming you have some customers and you know their source, you need to develop KPIs (Key Performance Indicators) around them. Specifically, your Lead to Customer conversion rate.
- How many leads do you come in contact with per week?
- How many of those leads convert to customers?
This would be your lead to customer conversion rate.
If you can increase your conversion from one customer for every 20 leads to two customers for every 20 leads, you’ve effectively doubled your conversion and doubled your revenue, which we know will increase your profit.
Or, if you can increase your leads coming in from 20 to 40, this should result in more customer conversions.
As a business owner, it’s important to continuously learn your customers and brush up on your sales tactics to improve your lead to customer conversion rate.
4. Utilize Upsells
In addition to improving your customer conversion for new customers, what could you be doing to get your current customers to buy more from you? It’s no secret that selling to and keeping existing customers is much cheaper and easier than selling to and acquiring new customers.
You should always be looking for ways to upsell to your current customers so they buy more from you. If you can think of ways to offer more value to your customers, this will result in higher revenue and profit.
Bonus tip: Also consider a referral program.
Think of ways on how you can implement a referral program so your satisfied customers can bring more customers to your business. This will increase your sales without you having to do much additional work.
Alright guys, I hope you find this post helpful in increasing your profitability. And if you want to be more in control of your business’ finances, be sure to entrust your financial management like bookkeeping, accounting, business taxes and more with the experts. LYFE Accounting is here to help! Contact us today.