We live in a competitive market. Your competition is evolving and adapting in different ways. You may approach your clients with a unique strategy, and your rivals will undercut your strengths. That’s business.
So, what do you need to work on internally to ensure your business is profitable in this joust?
In this article, I cover the different elements of your financial statements and outline the steps you can look into in your own business to increase your financial performance.
REVENUE
Without a doubt, the main element to keep your business functioning is generating revenue. At this point, you may already have a feel for your targeted market and know the highs and lows of your financial calendar.
Higher revenue is the target for your business, but the strategy you incorporate has a tremendous impact on your company.
STRATEGY #1 – REVENUE BY VOLUME
In a soft market, many choose a strategy that involves reducing their rates to meet their client’s budget. The idea behind this method is simple; lower prices are attractive.
However, this approach requires more in-depth business analysis for you to understand better what you are taking on by picking this strategy.
If you run a service-based business, lowering your rates may attract more clients but will increase your workload. Which raises the big question. Can your employees handle the workload?
There is a finite amount of work each employee can handle before they experience burnout. You need to invest some time to understand what this limit before you approach this revenue-generating strategy.
STRATEGY #2 – REVENUE BY VALUE
If you run a product-based business, understanding the value of your product in the market is essential. Create a list of unique factors that you offer with your product and compare it with your competition.
If you have a superior or niche product that stands out, then marketing these additional benefits will yield much better results. Be sure to check your pricing valuation against your estimated income, cost of sales and business expenses.
STRATEGY #3 – REVENUE BY PRICING
Pricing your products right is essential to the business, especially if your product isn’t unique. In this case, you should study your industry, market and competition thoroughly. It’s a numbers game.
Look into what it costs to run your business for a year and start working backwards. Identify any potential sales trends that your market faces. Once you have both of these in place, break it down to what is your minimum sales requirement to cover all of your expenses.
When you have this number in place, you will get a better idea of your position and strength.
If your target is achievable, you can work on new agreements with your recurring clients, offering them better rates and encouraging them to buy more.
If your targets are cutthroat, this calls for a new business strategy to build your client list.
GROSS MARGINS
Revenue is not the only way to achieve your desired financial performance. Finding different ways to control your cost of sales can help you make a better gross margin. In the end, it all comes down to covering your expenses and earning a profit.
Here are 2 ways for you to take control of your gross margins:
– IN-HOUSE
Before you go ahead with this run an analysis on your cost of sales, classify each one and get an idea of your average expense on this per month. Outsourcing is ubiquitous in a lot of companies these days. But when the quantity of work being outsourced increases, so does your costs.
If you expect to spend a minimum amount on a particular job skill that is currently outsourced, start looking into the cost of hiring someone to do the job in-house. Offering a fixed salary for this task is one way to control it.
If hiring someone to do this isn’t in your best interest, then perhaps you could strike a better rate with your outsourced. When it comes to suppliers, offering them some form of guaranteed payment gives them more security. You can approach them with an opportunity to perform a set amount of work for a fixed fee every month. This fee will be payable even if they do not receive that level of work.
– REBATE AGREEMENT
While you may be working in a competitive market, your suppliers are in one as well. A rebate agreement is one where you guarantee your supplier a purchase of X amount in a year. If you exceed this amount in the agreed year, the supplier agrees to pay back a set percentage of the total amount in this year. If you do not meet this minimum target, you do not qualify for a rebate.
For example; You have agreed to purchase a minimum $100,000 worth of items from your supplier. If you only buy $90,000, you do not qualify for the rebate. However, if you spend $110,000, the supplier has agreed to pay you 15% back as a rebate. So, in return, you get back $16,500 reducing your overall costs from $110,000 to $93,500
A rebate agreement will best work when you promise your supplier a minimum purchase amount that is higher than your current statement with them. It is a nifty way of getting your costs down.
EXPENSES
Improving your revenue and gross margins will help you cover your expenses. And to generate a profit, you need to control your costs. Stick to your budgets. Overspending is permitted if it influences revenue.
Expenses such as rent and medical insurance, are reducible by getting a better deal. Other business costs, like license renewal, remain fixed.
Your office, team, meeting and other such expenses are budgeted for and reducing them won’t have a significant impact on your financial statement. This is the case for small or medium-sized business.
In any company, the highest expense is always wages and salaries. It is the most significant expense to cover every month. Let’s take a closer look at this to see what the available options are.
Split your employees into 2 categories; revenue-generating and operational employees.
Revenue generating employees are the ones who are on the phone or out there bringing money in. They contribute to your revenue channel. Operational employees are the ones who keep the functions inside the business moving. Some of the operational employees are HR Manager, Finance Manager, Accountant, Office Manager, etc.
In this day and age, outsourcing is a new option for a lot of businesses. Bookkeeping is one of the examples. Companies out there offer accounting services for your business at affordable rates. HR and Finance Consultants or Freelancers are also available at lower prices. The cost of hiring this employee on a full-time contract is far more expensive for the business. By outsourcing these functions, you can still enjoy the benefits they have to offer at lower rates than you would typically pay.
Freelancers have been changing the industry for the better. For small and medium-sized businesses focusing on growing, this option works well. It reduces your cost of hiring an employee and allows you to invest more in revenue-generating employees that will contribute to your revenue.
Although it is helpful to have operational employees working full-time and focusing on the business, the growing stages of the company require more focus on revenue. This option opens the doors to a lot more opportunities for your business to then be able to afford such professionals when income is steady.
IN CONCLUSION – NET PROFIT
Finding the right strategy for your business, controlling your gross margins and finding ways to keep your expenses low, ultimately lead to a profitable business.
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