Are you making enough money to cover your expenses and live the lifestyle you hoped entrepreneurship would support? Here are some ways to get more out of your business.
Business picks up, you gain customers, your product or service is well received, but you can barely make ends meet and you can’t afford to scale your business – maybe the problem lies in your margin beneficiary.
First, make sure you understand the difference between revenue and profit. It’s actually possible that your business is generating money (i.e. revenue) but still operating at a loss, which means there is more money coming out of the business (for cover expenses, inventory, wages, etc.) than what comes in .
What do you want to know
Revenue, also known as turnover or revenue, is the money you receive from your customers for selling your products or providing a service.
Gross profit is what remains of your selling price when you deduct what it costs you to make or buy the product you are selling.
Net profit is the money left after deducting the costs associated with making or buying the product you are selling and all your other business expenses.
Profit margin is the amount of profit you make on each sale and is usually expressed as a percentage (i.e. what percentage of your selling price is pure profit that you can take home, invest or reinvest in business growth).
You can calculate your profit margin by dividing your profit by your total revenue. For example, suppose your business earned R5,000 last month and after paying all bills, wages, suppliers, etc., you have R1,500 left in your bank account – this is your profit.
Here’s what the calculation looks like:
Profit (R1,500) ÷ Revenue (R5,000) = Profit Margin (30%)
This means that if you sell your product for R200, R60 (or 30% of the selling price) is a profit.
The higher your profit margin percentage, the stronger your bottom line. If the number is too small, it means that you run the risk of incurring a loss in the event of unexpected expenses.
How to increase your profit margin
1. Reduce your expenses
If you bring in a good amount of business and charge a price that matches the rest of the market, you should look at your expenses and see what you can do without. Maybe you’re paying a full-time employee who could get the job done in fewer hours, or you’re using expensive materials and tools when there are more affordable alternatives, maybe you’re renting an office in an expensive place – take a close look at where the money is going and what you can cut or cut from your spending list.
2. Raise your prices
Be careful here, especially with existing customers. If you’ve underpriced your product or service, correcting it with a big price hike could discourage even your most loyal customer. Make sure your prices are still competitive, and maybe consider how you can provide more value to your customers to justify the higher price.
3. Get rid of slow moving goods
Old stock that no one wants to buy is worth nothing to you. Get rid of them by offering a clearance sale, then focus on your best sellers – the products that make the most money for your business.
4. Negotiate prices with suppliers
If you have a good track record with your suppliers and bring them good volumes, discuss the possibility of a discount. They might be open to this if you prepay or place a bulk order.
5. Accelerate production or rotation
It’s simple – if you can find a way to sell more products or services to more customers, your annual revenue will increase. A standardized approach or an easily repeatable service could help you do this. Look at where you can reduce the time spent bringing your product to market.