Our surefire tips to help small business owners make more and stress less.
Very few small business owners and entrepreneurs go into business with the goal of scraping by or earning less than they made before.
Yet many founders and SMBs struggle; more than 500,000 small businesses close each year. But it’s not always due to location, competition, the economy, or product-market fit; often it’s a gap in understanding vital concepts, like revenue and profit margins, and how to maximize them.
To give your business a leg up, this guide will help you master profit margins and revenue with 6 golden tips that go a long way in making your business more profitable.
But first: let’s get the basics right.
Consider this your mini MBA lesson for the day—and a helpful step in understanding how to make more money in your business.
Profit margin is how much a company gets from its revenue after paying its expenses, usually expressed as a percentage.
For example:
You pay $1 for an item, or the COGS (cost of goods).
You pay $.75 per item for marketing and shipping.
You sell the item for $3.
Doing the math, you earn $1.25 from every sale—a 41.67% profit margin.
But how much is considered a healthy margin? Frustratingly, the answer is: it depends. Variables like industry, geography, business strategy, and other factors determine good vs. bad margins and, while there are benchmarks by industry, there is no one-size-fits-all rule; an expert can guide you towards the right target.
When it comes to revenue, it falls into two main categories: gross revenue and net revenue. Gross revenue refers to all the money your business brings in without subtracting any costs. Net revenue is gross revenue after subtracting operating costs and expenses.
For example, you might earn $600K in gross revenue, but just $200K in net revenue after factoring in costs which, by the way, is a 33.33% profit margin.
Now that we’ve become experts in the terminology, what does it take to boost your profit margins and revenue? Read on for answers.
We know: this first tip may sound obvious, but that’s precisely why it’s so important to focus on.
If you’re going to maximize profit margins and revenue, you need a solid understanding of your finances, an objective look at the good, bad, and even ugly of your business.
While every company is unique in what they should consider, it’s wise to look at numbers by month, quarter, and year.
Get a grasp on your costs, cash flow, revenue amounts, profit margin, and, whenever possible, put them into graphs or charts so you have a clear visual representation of your data.
If it sounds overwhelming, it certainly can be. Looking at current and historical business data, ensuring it’s clean and accurate, and factoring in future projections is a heavy left, one that we recommend doing with the help of an expert.
After all: get this phase wrong and everything else is built on a shaky foundation.
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Small businesses pay, on average, a 19.8% tax rate on their gross income each year.
This can add up to tens-of-thousands or hundreds-of-thousands of dollars each year, meaning one of a business’ biggest expenses can be its IRS bill—which is why this comes in at tip number two.
To meaningfully boost your profit margins, it’s wise to maximize your tax deductions and credits, helping you significantly reduce your overall tax burden; that 19.8% tax rate is an average and many people pay far lower. Deductions and credits can vary by state, city, industry or even by who the owner is, especially if they’re a minority or woman entrepreneur, so having a savvy tax expert help you navigate the inner workings of the tax world is key.
There are additional strategies available, too, like tax deferral options that help you better leverage retirement plan contributions or deferred compensation. Or, businesses may strategically time major purchases or income based on tax optimization, which can be safe, legal avenues for boosting profit margins.
However, tax strategy is not simple—and getting it wrong can not only lead to major fines and financial impact, it can have legal or even criminal consequences, too.
Like sword swallowing or lion taming, this is best left to the professionals.
Most businesses are affected by seasonality, increased demand, or other factors. Whether your ice cream shop is busier in balmy July or your gift shop is bustling during Christmas, there are factors that create an opportunity to introduce dynamic pricing, or varying pricing based upon market conditions.
Think of Uber. When there is high demand for rides, there are surcharges to draw out more drivers to meet the demand—or so they say. And while you can’t charge 3x more for sprinkles because the line for ice cream is around the block, you can fluctuate pricing throughout your business, either overall or by product.
Dynamic pricing goes both up and down. The ice cream shop might offer a BOGO promo in January, then boost prices by 15% during baseball season, drawing in customers at slow times while maximizing their busy periods.
So, how do you know how to execute dynamic pricing—without making a mistake that frustrates customers or impacts your bottom line? A money and numbers expert is critical, an often under-utilized benefit of an accountant. By reviewing past sales trends and historical data, you can start to recognize when and how much to change prices.
Another tip that may sound obvious but deserves your focus and attention: cost control.
Whether those are variable costs, fixed costs, controllable costs, or anything else, saving money generally boosts your profit margin. Doing this, however, takes more savvy and knowledge than simply buying the cheaper toilet paper, or introducing unpopular austerity measures to your employee benefits.
Instead, cost control should be done in a more effective, sophisticated way, with the right guidance and expertise.
Imagine this is a very simplified cost summary for your small business expenditure:
Excited to grow your business, you soon realize you can’t get to where you want to go without the help of an expert. You bring in a virtual CFO who not only offers you new ways of looking at your business, but introduces new ways of saving money that benefit your customers, your employees, and you.
For example:
Here’s what your business looks like with costs under control and profits maximized:
The before and after is a stark contrast, all thanks to a savvy finance expert who brings not only expertise and experience, but objectivity and a more strategic view of your business.
Your business depends upon its customers; without them, you don’t have a business.
While most small business owners appreciate their customers at an abstract level, they’re less aware of their customers’ LTV, or the lifetime value of a customer. In other words, they don’t know what a customer is worth to their business from the first purchase to the last—nor do they know how to maximize that number with larger and/or more frequent purchases.
First, you need to understand just how much your customer is worth, or the customer value. You can find this out by calculating:
Average Purchase Value x Average Purchase Frequency
In this case, we’ll say your customers spend an average of $10 every 3 months.
Next, you’ll need to find your Average Customer Lifespan. How long do they buy from you before they stop, or go to a competitor?
Check your CRM, purchase history, and receipts to get a sense of how long customers buy; this may be difficult to measure, particularly if you’re a business that doesn’t often collect customer data, like a coffee shop.
Once you know, or have estimated, the Average Customer Lifetime, multiply it by the customer value:
Average Customer Lifetime x Customer Value
In this example, your Average Customer Lifetime is 15 months and, because your customers spend $10 every 3 months, they make 5 purchases for a total of $50—your customer Lifetime Value (LTV).
Now you know just how much your customers are worth, guiding everything from how much you spend acquiring new customers to how much you spend to retain customers, plus a variety of other metrics vital to your business.
To boost LTV, our experts suggest a variety of approaches, from loyalty memberships to subscriptions to email marketing to upsells and cross-sells. The idea is to make them not just buy more, but to buy more often and for longer. Focus not just on boosting sale sizes, but also how often your customers purchase—and extend how long they’re your customer.
And remember: the most expensive part of a business is acquiring new customers. Take good care of your existing customers and you’ll typically be able to spend less on generating leads or attracting first-time customers.
As your company evolves and encounters new challenges, having an expert who can not only help take tasks off your plate but bring experience to your operations will offer a proven way to boost profit margins and revenue.
Our bookkeepers, accountant, and CFOs note that, while internal bookkeepers and finance teams may suffice for some time at a limited level, having the external and diverse impact of experts becomes necessary soon after a business starts to grow.
Eventually, you need more flexibility, expertise, scalability, and specialized knowledge that even the best internal accountant can’t offer.
If a six-, seven-, or eight-figure business is a goal of yours, partner with LedgerWay’s team of finance experts who have helped take companies like yours to new heights—cost-effectively and quickly.
Book a call with our team to find out what LedgerWay can offer you.
National Business Development & Sales Manager
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