Interested in making your business more profitable in 2019? Easy… Sell more.. Duh!

A common conclusion to making a business more profitable is to sell more and subsequently add more revenue. While this will may help grow your business and lead to more profit there is one other commonly overlooked aspect that can increase your income. To understand this lets first look at what is profit.

Profit = Revenue – Expenses

In this equation, revenue is all money coming into the business and expenses is all money leaving the business. Therefore, to increase profit there are two options:

  1. Increase revenue
  2. Decrease expenses

Of course, most business’s will always be working on increasing revenue. However, it is important to consider the end goal here; ‘Does your business exist to increase revenue?’ or ‘Is it to increase profit?’ Likely it’s the latter, in which case turning some much-needed attention to the business’s bottom line (that’s accounting talk for expenses) is a great opportunity to cut the fat so to speak.

The first step to decreasing your expenses is to conduct an expense review. That may sound a little scary and make you feel a little nervous but stay with me.

  1. Get your transactions into the one place;

If you are like 99% of all small business owners you probably have business related expenses on your credit card, on your business credit card, on your debit card, from your PayPal account ect. The first step is to identify all your business-related expenses and get them into one place for easy review, an excel spreadsheet is a great place to work with these figures.

  1. Justify All Expenses:

Next you need to justify every amount of money that is flowing out of your business (Think Marie Kondo – ‘Does this bring you joy?’). Go through each transaction line by line and ask yourself is this spend adding real business value and contributing towards your business goals? Eg. Is 5k per month on a subscription service truly adding 5k of additional value to your business? If you answer no then it may be time to cancel some services or at least consider downgrading.

  1. Categorise your expenses:

Once you have conducted the initial justification check its time to categorise your spend and determine where your money really is going. Some categories you could use might include Travel, Training, Conferences, Salaries, Entertainment and Software. This process has two major benefits.

A. Identify areas of overspending

No matter what size or structure your business is, it’s almost guaranteed you are going to come across a category of spending that you are simply shocked at the monthly or quarterly contribution. Are you spending too much on conferences? Too many extravagant client dinners? Is your cost of production much higher then you expected? Now that you have identified where some overspending has occurred it’s much easier to focus on reductions in those areas.

B. Find areas to reduce:

Maybe you have reviewed all your expenses, dotted every I and crossed every t and yet you’re still struggling to make a profit. This process of categorisation can really help to find areas where reductions need to be made. Rank items by their percentage of total expenses. The items highest on this list should be essential core elements of your business, eg. Rent, Salaries, and costs of goods sold.

  1. Optimise:

The final step in the expense review process is to find ways to optimise your business processes, policies, and procedures. Consider where your money is being spent and how you could achieve the same outcome for less. For example, we had one client who was spending a fortune travelling between two cities and renting hotel rooms. A much more cost-effective solution was to rent a long term furnished apartment at a much more reasonable rate then costly nightly accommodation. This also created a second revenue stream as the client was able to rent the apartment out when travel was not necessary.

We get it, digging into the financials is not easy, especially if it is something you have neglected for a while. We love our business’s and it can be emotional to dissect them. It can also be extremely powerful, inspiring and innovative way to help grow your business. By focusing on your business’s core goal and if each item is really contributing to that goal you can help increase profit and simultaneously feel more in control of your business financials.

Clear Margin Consulting is a Financial & Strategy Consulting Firm based in Vancouver, Canada. We help small business owners to better manage their financials so that they can make better informed decisions and grow their business.

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