Your gross profit margin is the key indicator of business success. There are plenty of costs associated with providing any product or service, and those costs multiply when you sell more product. After all, $200,000 in gross profit of $1 million in sales is much better than $150,000 gross profit from $2 million in sales. Strategizing for profits comes before strategizing for growth. Here are some methods to ensure you’re getting solid cash flow.
Eliminate Unprofitable Products
Even if you built your company on flashy “Z type” guitars, the day may come when they cost too much to produce, even if they’re still popular. If you can’t find ways to improve efficiency and lower cost, it may be better to cut out certain products than to keep losing money. Sometimes brand value and actual profit are two different things. The same goes for services. Free shipping is important to 71 percent of clients, but if it’s killing your profits, find another way to offer customers value.
Target new customers
A major competitor may be dropping prices to capture a better market share. Price wars are bad for business. During the telephone price wars of the late 1990s, AT&T’s stock value dropped 4.7 percent in one day. If you have customers that aren’t willing to pay what you need, it may be better to find a new market segment than to compromise your quality or pricing strategies. Focus on value, not price, and identify new demographics that can still be profitable.
Though you’ll encounter hard-to-please customers frequently, the worst in terms of profitability are those who are slow to pay or don’t pay at all. Litigation and collections costs can reach 33 percent of profits in some companies. To counter this, ask for down payments. Poor credit ratings, or small and startup clients making large orders, represent high risk. This applies more to B2B companies, and you may risk losing the client altogether. The best way to increase profitability, however, is to avoid wasting time and money on clients you should have turned away.
U.S. companies lose about $60 billion yearly from theft. Even if your assets are insured, it still means lost time, missed opportunities, and unhappy customers that eat away profits. Be sure to implement property security. This includes upgraded locks, adequate lighting, cameras, and alarms. You might also want to contract with a professional security company, like Trident Security, as a physical presence on your property will be a deterrent to most intruders.
Eventually, you’ll find that certain products no longer justify the cost of producing them. You’ll have to change your marketing or the product itself, and sometimes both.