You work hard in your business, but for some reason, you do not achieve the profitability your revenues should be able to deliver. This is a common problem, that is particularly evident in the organizations with whom I have worked over the past nine years as a mentor at SCORE. It is particularly common to small businesses without highly-seasoned management personnel to address profitability questions.
Here are a few basic reasons for a lower-than-desired profitability, which if you address, can provide a relatively quick and often easy solution.
Your own expectations.
First, consider whether you have realistic expectations of what your business can achieve. This requires you to try and “benchmark” your situation by:
- Talking to your accountant with experience in similar businesses to give you an idea of what they achieve
- Talking to your industry trade or professional organization to see if they might be able to give you some parameters
- Visiting the reference librarian at a business library in your town, as they often can find resources that provide profitability benchmarks for various businesses
- Doing a Google search to see if there are any resources to help you
- Consulting with a SCORE mentor at any of their 300 chapters or online
Evaluate your pricing structure.
Often, a small price increase will not affect the sales of your product(s) but could significantly impact your bottom line profitability.
Analyze your overhead.
Frequently, one of the biggest issues with small businesses is the level of overhead they carry. This can be due to:
- Too many staff members
- Health care costs that are too high. You should talk to your providers or perhaps have your employees pay some of the costs of their policies
- 401K plans. You need to reduce or stop your contributions
- Excessive spending on either travel or entertainment
Evaluate your cost of goods.
This is particularly the case for companies that buy finished goods and resell them on the Internet. In some situations, we SCORE mentors have helped clients identify lower-priced ingredients for manufactured items that will not affect the final taste or quality
Have your accountant or bookkeeper help analyze your aging of receivables report to identify possible issues.
This is one of the most common issues I see at SCORE with my clients. They are so busy running the business that the receivables do not get the attention they deserve. You should be looking at an Aging of Receivables report at least every two weeks to identify problems that might need to be addressed. Remember “receivables do not buy groceries, cash does.”
Address the absolute level of revenues you are generating.
Your problem might be a sales issue. You might need more sales in order to achieve a higher level of profitability. However, even if you are able to increase your sales, you must address the above items also if you want to maximize your company profitability.
Finally, I highly recommend you contact your local SCORE chapter to find your own mentor. SCORE mentors are also available to work with you via email and video chat.