So you’re a small business owner and you’d like to see your profit margins increase? Much to the confusion of many business owners, a substantial increase in sales isn’t the only way to make this happen. There is another way to increase your profit margins, without reaching for unreasonable sales targets, hastily employing more staff or adding to your overhead costs and capacity – all it can take are some small cost-minimisation and productivity improvements.

Reducing costs directly can dramatically increase the profit made on each sale and have an immediate positive impact on your bottom line. To make it simple, we’ve put together 5 top tips for increasing profitability by reducing costs and maximising your small business’ productivity.

  1. Understand your financial performance & identify your costs

Start by evaluating your profit and loss statement (P&L) for the last financial year and rank your expenses from greatest to smallest, identifying areas where you see the possibility for cost reductions along the way. Your P&L statement reflects the past performance of your business by summarising the income over a period and subtracting the expenses simultaneously incurred in that period, allowing you to review your expenses and find room for improvement.

The first step toward reducing your costs is first understanding where your expenses lie. Some examples of major cost centres include production, purchasing, sales & marketing, financing, administration or rent & utilities.

But then there are smaller, sneaky ones like stationery and that wonderful catch all ‘office expense’ that can suck up profits like there’s no tomorrow. You might want to run your eye over these every so often and ask, “is that really a necessary purchase?”

  1. Time to save

As a business owner, don’t be drawn in by the assumption that cutting costs means sacrificing quality and/or performance. Below, you’ll find just a few examples of methods that deliver quick savings results, without the unnecessary cuts to quality:

  • Start with waste reduction, artificial heating/cooling costs and utilities charges – why not switch on the fans instead of the air conditioner and reduce your energy consumption by up to 85%?
  • Avoid small, frequent orders and opt for large orders, less frequently to minimise time and delivery expenses
  • Negotiate better payment terms or discounts on bulk orders with suppliers – or shop around for cheaper alternatives (without compromising quality)
  • Introduce systematic procedures to help minimise errors or wastage and reduce time and money.
  • Of course, there are also some more extensive options for operational cost cutting to improve your profitability, such as:
  • Agreeing to long-term supply contracts to secure minimum terms
  • Forming alliances with other businesses to buy larger volumes
  • Relocating to a more cost-efficient office location (although this is not a small decision, nor is it without costs of its own)
  • Removing poor performing products from your product-range

As always, it is important to consider that every business is different and there is no one-size-fits-all approach to minimising costs or changing business strategy, so it’s important to seek independent advice.

  1. Trial changes

It can be difficult to anticipate savings without first having implemented or trialed any cost-minimisation measures. It’s important to remember that changes don’t need to be permanent. Why not consider implementing a process or new system for a 3-6 month period? That way, if you find that a particular cost-saving measure isn’t suitable for your business, you haven’t committed to anything long-term.

  1. Streamline processes (there’s an app for that)

Consider the technological investments that could make a great difference to your company’s productivity, sales and ultimately your success. Investments range from large operational processes such as new POS system software or mobile devices so staff can make sales on the run, to small business management apps that can greatly reduce time spent on every day office tasks. Check the processes you currently have in place and consider those that you could automate.

Automating every day processes, allows for greater productivity, saving money spent on employee’s time, errors and wastage. For example, Shoeboxed Australia – an app that automates your data entry process by scanning, inspecting and putting all of your receipts in the cloud. Or, if you produce quotes regularly, you might try a simple document automation tool, such as Quote Roller, that creates your sales documents or quotes without the need to re-duplicate! According to Quote Roller automating processes can boost productivity by up to 35%!

  1. Report, review & react

Setting measurable, time appropriate targets can help monitor how effectively your processes have been implemented. Consider profit and loss reporting on a monthly basis to track your business’ performance. At the end of a 3-6 month period, review your performance and again, note possible areas for improvement. A simple planning cycle will allow you to make continuous improvements to your business’ processes, reduce costs, increase productivity and see improved profitability in the long-term.

Of course, if we can help you to better understand your financial position and improve your profitability, we’d be delighted to help. You can call Kerry on 6023 1700drop us a note or connect with Kerry via LinkedIn.

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