Finance & Accounting

Increase Your Company's Profit Margin

Increase Your Company's Profit Margin

It might be tempting to handle your tax reporting in-house, but it's important to remember that you will sacrifice time that could be spent on running your business. Learn how to choose the best fit for your business's tax reporting needs.

By Jo Anne Killeen

As a small business owner, you make several decisions each day that impact your company’s financial future. Each choice, whether it is price setting, selecting a vendor or purchasing office supplies, eventually shows up in your bottom line. Your profit margin may seem inevitably low at the end of a business cycle, but there are many factors along the way—including payroll management and time management—that you can control in order to make it higher. In fact, maximizing your company’s net profit margin is as simple as learning to make better decisions—every single day.

Increase Efficiency
Each month you should take a step back and consider whether your employees are spending time on projects that add the most value to your business. Think about tasks within your company that could be automated in order to free up time for more profitable jobs. “Every month sit down and ask, ‘What are the things we are doing by hand that we can outsource?’” says Bruce Judson, a senior faculty fellow at the Yale School of Management in New Haven, Conn., and award-winning author of Go it Alone: The Secret to Building a Successful Business on Your Own.

Application Service Providers, or ASPs, are a cost-effective and efficient way to outsource certain business functions such as payroll, Judson says. ASPs often are low-cost software providers that can be rented on a monthly basis and are hosted off-site. ASPs cut costs because they allow businesses to perform tasks such as billing without requiring them to purchase expensive software or train employees to use it.

Experiment Every Day
It may be human nature to stick with something that works, but developing new strategies could propel your business to new levels of efficiency. “If your business is doing a year from now what it is doing today, you’re in trouble,” Judson says. “I have found that people who are successful find ways to test things at low cost.”

While experimentation is a key component for success, Judson says caution is paramount. “Never bet the ranch,” he says.  Successful entrepreneurs make decisions only after seriously considering how they can manage risk. “They are always looking at the down side,” he says. Always take into account the direct and indirect costs associated with trying something new. For example, if you are considering opening your store on Sundays when it is typically closed, keep in mind possible overtime costs for employees.

Avoid Common Mistakes
A 1993 Wall Street Journal article by Peter F. Drucker, titled “The Five Deadly Business Sins,” lays out the keys to avoiding common mistakes in business. Admittedly dated, it remains relevant for today’s small business owners, according to Peter Sealey, founder and CEO of small business consultancy The Sausalito Group Inc. in Sausalito, Calif., who studied under Drucker while earning his Ph.D. in management at Claremont Graduate University in Claremont, Calif. Drucker’s advice can help any business grow its profit margin, Sealey says, and he recommends the following tips for doing just that:

Focus on profit margins.
Many businesses confuse a high profit margin with a high profit, according to Sealey. “You have to take into account the volume of product you sell, and it’s always better, I think, to be aggressive in your pricing margin and make the product or service you’re offering very attractive,” he says. “You can work on enhancing margins later on, but if you mismanage the margin initially, your product, your service and your business fail at the outset.”

Offer fair prices—all the time.
Don’t hike up the price of a product or service simply because a temporary situation forces demand. “There may be a shortage in the marketplace for this market service and you have an opportunity short-term to really ramp up the price. I think that’s a mistake. People remember that,” Sealey says. “I think it’s always better to price for the long term.” Determine a price that will allow you to make a fair and good margin over the long haul; people will recognize it and reward you for it.

Listen to the market.
Let the ideal price of a product or service determine its cost, not the other way around. A lot of companies take the cost of a product or service and put a margin on top of that to determine a selling price. “We should use price-driven costing,” Sealey says. “We should determine what we can sell our product or service for and then create a profit and manufacturing and cost structure that will permit us to do that.” Establishing an ideal price first and then creating a cost structure based around that price also decreases the chances that you will add unnecessary extras to your product. 

Keep your eye on the future.
Don’t put all of your resources and best people on projects that serve the present market. Some of your brightest minds and financial investment needs to focus on future products and services. “You have got to look at the future of where the market is going, not where it is,” Sealey says.

Feed opportunity—don’t starve it.
Don’t use all of your energy and resources to fix problems at the expense of new opportunities. “I see so many clients whose days are commanded by the problems of the company, by friction points. They’re using their best people to try to solve the business’ problems,” Sealey says. “Problems never create cash and income and margin. Problems are yesterday’s activities. Opportunity is where we have to focus.”