Last Updated on Apr 15, 2020 by James W
One of the best and most effective ways of maximizing your profits is to understand the information in your numbers. This probably sounds pretty obvious, because you need to be able to work out profit margins and overheads accurately, however small your business. What many entrepreneurs fail to realize is just how much more they can harvest from their accounts if they study them more intimately. If you can make more money and increase your profits without doing anything more than some straightforward interpretation of your figures, it makes no sense not to.
I’m an entrepreneur, not an accountant!
You don’t need to be a CPA or a math whizz to get the best out of your business. If you have a grasp of the basic principles of how business finance works, you should be able to expand this knowledge to leverage more profit, without having to spend hours studying your spreadsheets. Pricing is a good example of how analysis of your numbers can increase your profits. It’s simple enough to work out that Product A costs ten dollars to buy, and you sell it for twenty dollars, which is a one hundred percent markup. You should also have already calculated the additional costs that have to be deducted from the gross profit to reach the net profit figure, that is how much actually goes into your pocket at the end of the day.
Your overheads, costs like marketing, staffing, infrastructure, taxes, anything that you have to pay out for all has to be taken away from that ten dollars of gross profit. Then you are left with the figure for how much Product A is actually making you. That’s probably as far as you’ve gone up to now, but this is where you can look again at your strategy for pricing and see if there is room for movement. On a spreadsheet, enter the prices of some of your bestselling lines, listing cost price, sales price, gross profit, costs, and net profit. Now see what happens if you increase the price of the item by one dollar.
It may not sound like much, but if you are selling high volumes that can soon add up to a substantial increase in revenue. People can be reluctant to raise prices because they are worried about losing customers to cheaper rivals. The question is, do you know exactly what all your competitors are pricing their products at, and what do they offer that adds value to a purchase? Until you know this, you won’t be able to accurately pitch your pricing at just the right level to maximize sales.
Costs and outgoings
Keeping a watch on pricing is crucial for maintaining your competitive edge and bringing in the bucks. The flip side of this is being able to identify where you are spending more than you need to. One of the most popular side hustles of the moment is using Amazon’s marketplace seller scheme, whereby your goods are held at Amazon’s own warehouses and are picked and packed by their staff, so you don’t need to hold stock or worry about deliveries.
It’s a system that works very well and has become incredibly popular, taking a lot of the stress and time commitment out of selling goods online. However, to make it work you need to be accurately assessing your stock costs and deducting the Amazon fees accurately. If you’re sourcing products from China, for example, have you pushed for a better deal? Suppliers can be negotiated with for reductions in per-item costs, especially if you purchase in higher quantities. There is a range of suppliers across the world selling all manner of products – have you looked at costs for purchasing the same or similar goods from an alternative source?
Once you’ve established the most cost-efficient method of acquiring your stock, you then need to balance that against your Amazon costs. You must make sure you’re on the right payment plan and that you have weighed up any increase in warehousing charges against potential savings from sourcing cheaper products.
Use your business sense to read between the lines
If figures were everything, you could just set up a software program to run your business remotely while you lay sunning yourself on the beach. However, there are some aspects of your figures that require interpretation and an appreciation of the bigger picture to analyze successfully. Say you have a small engineering business that designs and sells hydraulic machinery.
Your success will be dependant on the quality and efficiency of your products, and these are the touchstones of your reputation among potential customers. If you wanted to reduce the price of your machines you would be looking to save money, perhaps by finding a cheaper parts supplier. When you put the figures into your spreadsheet, on paper, the cheaper parts lead to higher profits.
However, if they are sub-standard, they will end up damaging your reputation and reducing your profits in the longer term. Stick to a reputable supplier like Custom Fittings Ltd, and you can be sure the quality will be such that you’ll be better off in the long run.
Getting some help
If you really don’t enjoy crunching the numbers, or you lack confidence in your abilities to analyze your figures accurately, and to best effect, you can get help. There are some very clever accounting and small business software packages available that can help you manage your accounts and produce reports that will show you everything you need to know about how your money is working for you.
There are also some excellent resources available online that can guide you in detail through the processes of analyzing your figures and give you an insight into the factors you need to consider when making decisions based on the information you have gathered. Or you could look for an accountancy service that specializes in helping businesses maximize their profits.
Looking below the surface of your business operations and picking out the information that will increase your profits is one of the best ways of ensuring the stability and profitability of your enterprise. It’s all there in your figures, so get into the habit of making them work for you.
