This seems like a straightforward question. But, a surprising number of business owners can’t provide an accurate answer.
Many are too time-poor to dig down into their numbers to really understand their profitability, and others don’t fully understand how to manage their costs to maximise profit.
So, where do you sit on the spectrum?
Do you know how profitable your business really is?
If not, this article has been written for you!
Keep reading as we will explore the difference between profit and cash flow, look at the main areas of cost businesses need to consider, and provide some insight into how to improve your profitability.
Let’s go.
Two things that get easily confused as profit and cashflow. Just because you have money in your bank accounts at any point in time does not mean your business is profitable.
To really understand the financial health of your business, you need to have a solid understanding of cash flow and profit – two very different things.
Cash flow is what keeps your business running from day to day, but profitability determines whether your business is sustainable long-term.
It’s possible to have a positive cash flow and still be unprofitable, and vice versa.
So, what’s the best way to get a clear picture of your profits and cash flow?
By thoroughly understanding your costs.
When we don’t have the time or experience to really drill down into the financial details of our business, we often make assumptions about how profitable different aspects of it are.
At a glance, you might assume you’re making a profit on a product or service. But if you considered the actual costs to produce and deliver that item, the numbers could tell a different story.
Costs such as storage, customer service, or shipping can eat into the profits more than you might think. So it’s vital to have accurate data in order to fully understand your profitability.
If you can’t accurately identify your costs, you aren’t getting a true idea of your cash flow or profitability, which could be disastrous for your business long-term.
To make a solid profit, you need to earn more than you spend. That concept is simple. But accounting for all your business costs can be more complex. Sure, there are obvious costs that you are certainly aware of, such as buying stock and paying wages.
But, there are other things that can soon add up and eat into your head earned profits! Let’s take a look at the main costs (that sometimes get forgotten or overlooked) that businesses need to account for. They are:
Licenses, memberships and permits
Office space and supplies
Tools, repairs, and upgrades
Wages and benefits
Insurance
Payment delays
Professional services – such as accountants, lawyers, or virtual assistants.
Credit card fees
Inventory
Production
Marketing
Utilities – power, internet, phone bills etc.
Taxes
Shipping
Travel
With such a long list of costs to account for, it can feel like an impossible battle to make your business profitable. But, it is certainly possible to do!
Here are some of the ways you can increase your profitability:
Your pricing model is the foundation of your cash flow. Get it wrong, and you will struggle to make enough money. Instead of setting prices based on what others are charging or what you feel is fair, try reverse-engineering what you charge.
To do this, you will need a detailed understanding of your business expenses. This gives you a clear idea of how much income you need to be profitable and helps you set the prices to match.
Knowledge is power. Make it a priority to update your accounts regularly. Having an accurate overview of your financial state at all times enables you to make intelligent decisions about where to invest your money.
This data will enable you to set reasonable goals and guide your business in the right direction.
One of the simplest ways to increase profitability is to cut costs. Shop around to make sure you are getting the best deals from suppliers, find out where you can streamline your processes to be more productive, and reduce waste wherever you can.
Managing your customers does not have to be a labor-intensive process. While you want to maintain the excellent service and human element of your business, there are things you can do to streamline your interactions. Work on targeting your ideal customers and increasing profit through the use of CRMs, upselling, and honing your sales funnels.
One of the best ways to increase your profitability is to get financial advice from an expert outside your business. Removed from the daily tasks of your business, they can take an objective view of how you are operating and aspects that you could tweak to improve your profitability.
Wise Advice can offer valuable insight into all aspects of your accounting, help you identify areas for improvement, create a business plan and provide ongoing profitability management. Get in touch with us today to discuss how this could work for your business.