Do you look at your financial statements and bank account at the end of the month and wonder how you could do better? Maybe you’re thinking that you actually have a really good business. It has a reasonably high volume of sales and good staff, but the business bank account just doesn’t seem to be reflecting what you think the business should be producing. In this article we’re going to have a brief look at the things that you can do to improve profits and cash flow, because both of these contribute to growing your business bank account balance.
How to Improve Profits
Improving profits is one essential element to increasing the balance of your business bank account. There are several things that can be done to improve the profits of your business. You can reduce cost of sales, reduce operating expenses or increase your revenue. We’ll discuss what each of these means and how to go about evaluating them.
Reduce Cost of Sales Expenses
Cost of sales, (also known as cost of goods sold or direct costs), are costs that are directly attributable to the sale of your goods or services. If you’re a services business, this is the cost of the labour that performs the billable work. If you’re a business selling goods, then it’s the cost of the widget, (purchasing or manufacturing), as well as any associated freight costs. A very simple concept to grasp is that businesses need to buy at wholesale and sell at retail. If you’re able to reduce the cost of your widgets or billable labour, then expenses go down and profit goes up. This will also help the balance of your business bank account.
Assessing Labour Costs
One important consideration is the true cost of your labour. Many business owners might think in terms of the hourly rate plus allowances and super, but there’s a whole lot more to consider. Super on its own is currently an extra 9.5%. If you add annual leave, it’s an extra 7.7%, personal/carer’s leave adds 3.9% and public holidays (in Victoria) currently adds 4.2%. You have these obligations for every 52 weeks that your employee works. As your employees acrrue leave while they’re on leave, they’re actually only working for about 10 months and getting paid for 12.
When you add up these extra costs, that gives you an extra 25.3%. We’re also ignoring Long Service Leave for now which, depending on the industry, could be mandatory (CoINVEST) as could redundancy payments (Incolink).
It’s also important for you to track your employees’ non-billable hours. This will help you know the dollar value of idle or administration time for each person. You want to set a Key Performance Indicator (KPI) for each staff member’s ratio of billable to non-billable hours and monitor this. This will help prevent drainage of potential profits for your business.
Knowing your true labour costs will help you determine what you should be charging to make the profit margin that you want. We’ll cover more of that later.
Assessing Material Costs
Overpaying for your inputs, or material costs, will not help your profits. It will also give your competitors an advantage you really don’t need them to have. For some businesses it means planning ahead and knowing demand for various product lines at different times of the week, month or year. Or it could mean scheduling production times carefully and ensuring that all necessary materials are on hand to avoid stopping production and time being wasted.
As inventory can have very high movement volumes, software makes this a great deal easier to track. Sometimes using an alternate supplier to provide inputs or materials means a significant increase in costs. It is worth developing long-term relationships with suppliers, and paying them on time whenever possible. In many industries the list price is highly negotiable. If you’re going to be doing a lot of business with certain suppliers, make sure that you negotiate. It may be easier to bargain over time, but don’t neglect this opportunity to reduce your input costs. It’s also a good idea to have back-up suppliers under certain circumstances. Do your homework ahead of time.
If your material costs are highly variable, you need a way of tracking this and averaging it out. The right cloud-based software will help you manage this. You can’t determine the correct selling price if you don’t know your average buying price.
Assessing Job Costs
It’s a really good idea to set up a job management system that tracks every cost, material and/or labour against the quote or final invoice value of the job. This can be done in Excel, which is tedious and time consuming. These days you’re better off getting a cloud-based app that’s specific to your needs. Staff can input their hours on the go, and this can also be the basis for timesheets and payroll. The business owner, an administrator or a bookkeeper can then be responsible for adding billable materials to the job.
What you really want to do is run a profit and loss report for each and every job. Rather than relying on a hunch that you made money on a job, or broke even on a job, you want to know for sure. You can’t fix what you can’t measure. By knowing how profitable a job was, you’ll be able to improve your quoting and increase the chance of the right level of profit on future jobs.
Reduce Operating Expenses
Operating expenses are costs that are not directly attributable to the sale of your goods or services. These include costs such as rent, electricity, non-billable labour, stationery and insurance. Although some of these expenses could be considered cost of sales in some businesses, we won’t go into that level of detail here.
When looking at your operating expenses, look for non-essential items. What could you stop spending money on that really wouldn’t make a big difference? Although some discretionary costs may boost staff morale, be careful not to overindulge. Also think of alternatives to current costs. There may be a way of achieving the same outcome at a lower cost.
Check that you’re not overpaying for essentials. It’s easy to continue with a regular monthly or annual payment and not think twice about it. Review these regularly.
It’s a good idea to know what your overheads are every single month. These are the costs that are pretty much fixed and are required in order to keep your doors open, whether you sell a single thing or not. You can then calculate how many widgets, jobs or billable hours you need to sell every month in order to break even.
Increase the Price of Your Goods and/or Services
This comes down to a few variables such as your competition, how much the market can bear to pay, knowing your costs and valuing yourself. The last one seems to be the toughest for some business owners to overcome.
If your competitors are charging much less than you are, then you need to be delivering a superior product or service to run a viable business. It’s a good idea to know what niche you serve in the market, who your competitors are, what niche they serve and how much they charge. This then allows you to determine whether you feel that your products or services are fairly priced.
You may produce a incredibly well-functioning and high quality product, but if a cheaper alternative can be bought, thrown away and bought again several times over for the same cost of your product, then you may find it difficult to gain traction in the market without investing a great deal in marketing and educating your customers. It’s good to understand what your customer is willing to pay for your product or service and what alternatives exist.
If you know the costs of your widgets, jobs or billable hours, then you can go about determining the selling price by the margin you wish to earn. If you discover that you had been underestimating your costs, then you may very well need to increase your selling prices. Depending on your business, you may need to do this gradually. Other businesses may lend themselves to immediate price increases, especially if they’re very busy and more customers keep coming through the door.
If you don’t value yourself, you’re probably inclined to undercharge, and this is a tough mental enemy to overcome. The only cure for this is increasing your self-worth. Read books, attend seminars and hang around people who will help you expand your belief in yourself.
How to Grow Your Business Bank Account Balance
Growing your business bank account balance comes down to two things. The first and most essential component is business profitability, which we’ve covered above. The second is cash flow. If you make sales and don’t collect the amounts owed to you, or have debts that require repayments, then these are going to drain your bank account balance even if you make a profit. If your business makes $5,000 in profit, but you have $1,500 in loan repayments and $3,500 worth of unpaid sales, then your bank account balance will be the same as last month, all else being equal.
Collect Your Receivables
It’s vital to your businesses to collect the money that is owed to you. If you’re not in a business that receives cash at the time of the sale, then you need to have a plan to collect your Accounts Receivable amounts. It can start with credit checking your new customers to make sure that they have a good credit history, issuing invoices promptly, regularly and consistently following up late payments, offering inducements for timely payment or applying penalties for late payment. Consider offering small discounts for on-time payments, set up direct debit for new customers, waive small price increases to encourage existing customers to sign up for direct debit and/or have a stop credit policy if payment is late. This means not selling your customer anything else until they’ve paid their overdue account.
It’s really important to train your customers in how you want them to treat you. Are you the last on their list for payment? Or are you one of the first? How you behave towards them will make a big difference. Remember that the squeaky wheel gets the grease. If you’re always ringing and asking for payment, many customers will start paying before you ring to avoid having to speak to you.
These strategies are very much industry dependent. Think creatively about what you can do to improve the rate at which you collect outstanding amounts.
Keep an eye out for spending that’s prompted by your ego. You might like buying a pricey new car every three years. If it’s not essential to running your business, it may be frivolous. Yes, a business owner that works hard and runs a profitable business deserves the fruits of their labour. However, if your business isn’t performing the way you would like, then it might be a good idea to tighten your belt in the short term and rid yourself of the debt so that you can free up the cash flow to reinvest in your business. Buy yourself that car when your business performance says that you deserve it.
Being in business requires a lot of planning, monitoring, evaluating and adjusting. You absolutely need good systems in place to help you track essential information so that you can make good business decisions. If you know that you’re not great at doing this kind of work, make sure that there is someone in your business who has this covered, and make sure that they regularly report to you on how your business is tracking in key areas that you know you need to stay on top of.