6 min read

Is Your Business Profitable? How to Level It Up and Guarantee Success.

How to make your business profitable.

Are you in business just to stay afloat, or are you actively trying to make a profit? That's the million-dollar question all small business owners must answer. The reality is that it's not easy—or cheap—to measure success when it comes to profitability. But, like with any successful venture, there are clear signs and indicators that can help you understand if your small business is profitable or headed for choppy waters ahead. In this blog post, we'll uncover key signs of profitability and offer advice on how you can propel your small business into more lucrative territory!

 


 

Profitable Small Business | Accountingprose

 

Why is understanding Profitability important?

Understanding profitability is essential for small businesses since it provides them the opportunity to identify areas of growth and areas that need improvement. By understanding its current financial position, a business can make better decisions when it comes to allocating resources and making investments.

Having insight into the financials of their business allows small business owners to get a better idea of what’s working and what isn’t, which in turn can help them make more strategic decisions about how to move forward. Additionally, understanding profitability can help small businesses secure financing from banks or other sources, as lenders will want to gain an understanding of the company’s finances before they are willing to lend any money.

Profitability also provides small business owners with the ability to forecast their future income and expenses by looking at their past results. By using past records as a benchmark, small business owners can create accurate budgets based on their projected future income and expenses. This allows them to plan ahead and be prepared for any unforeseen events that may arise in the future. Lastly, understanding profitability helps small businesses attract potential investors who are looking for a return on their investment. Investors want assurance that their capital will be put towards something worthwhile, thus having detailed financial records outlining the success of prior investments is often enough for potential investors to feel comfortable investing in a given small business venture.

 

 

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What metrics should you track?

It’s essential to understand how your business is performing in terms of profitability. This means understanding and tracking key metrics that can give you an idea of whether or not you are making money. Knowing these metrics will help you make decisions about what strategies to pursue in order to increase profits.

 

Breakeven Margin of Safety

The breakeven safety margin represents the gap between the actual revenue level and the breakeven point. In other words, the amount by which revenue can drop before losses begins to be incurred. The higher the margin of safety, the lower the risk of incurring losses.

Revenue - Breakeven Point = Breakeven Margin of Safety

 

Breakeven Point (BEP)

The breakeven point represents the sales amount that is required to cover fixed and variable costs of the business. At the breakeven point, the operating profit is equal to $0.

Fixed Costs / (1 - (Variable Costs / Revenue)) = Breakeven Point

 

Expense-to-Revenue Ratio

A measure of how efficiently the business is conducting its operations. While growing revenues, management needs to monitor the change in expenses. A significant rise in the expense-to-revenue ratio may indicate the eroding of margins and should prompt action.

(Cost of Sales + Expenses) / Revenue * 100 = Expense-to-Revenue Ratio

 

Gross Profit Margin (GPM)

Gross profit margin is the proportion of revenue that is left over after deducting all costs related to sales. 

Gross Profit / Revenue * 100 = Gross Profit Margin

 

Net Profit After Tax Margin

A measure of the proportion of revenue that is left after all expenses have been paid. For this period, the Net Profit After Tax margin is below the required target. This may indicate cost blowouts that require efficiency improvements.

Earnings After Tax / Revenue * 100 = Net Profit After Tax Margin

 

Operating Profit Margin

A measure of the proportion of revenue that is left after deducting all operating expenses. This reveals the operating efficiency of the business. The operating profit margin can be further improved by improving price, volume, cost of sales, and expense management.

Operating Profit / Revenue * 100 = Operating Profit Margin

 

By tracking these figures over time, you can get a better sense of where your company stands financially and identify areas for improvement. Additionally, monitoring trends in the industry, as well as competitors’ performance, can provide further insight into how your own business is doing compared to others in the same space.

 

 

Common Small Business Mistakes | Accountingprose

Avoiding the most common profitability pitfalls

Small businesses are often prone to losing money due to neglected common areas of leakage. Such areas of leakage can include inefficient processes and poor cash management, lack of customer focus, and unproductive sales strategies. To prevent these costly leaks, business owners must take proactive steps to address each issue in a timely manner.

 

Inefficient Accounts Receivable Processes

Accounts receivable processes are vital for all businesses, large and small. By having a detailed, organized approach to accounts receivable, businesses can ensure that they are getting paid on time and accurately. An effective accounts receivable process allows companies to collect payments efficiently while also protecting themselves from bad debt and loss of revenue due to late or missed payments.

 

Step 1. Send Out Invoices On Time

The first step in the accounts receivable process is to create and send out invoices to customers that have made purchases or services from the business. Invoices should be clear, and accurate and contain all of the necessary information such as an itemized list of items purchased, payment terms, due date, and contact information for both parties. 

We use Xero to help our clients send out invoices on time. We can easily add a company logo and custom language to match their company brand. 

 

Step 2. Follow up on Outstanding Invoices

Once an invoice is sent out, businesses should follow up with customers regularly to make sure payments are being made on time. This can be done via phone, email, or in person depending on the customer’s preference. If payment has not been received by the due date, a late payment notice should be sent out to remind the customer to make their payment.

We use Xero to automatically send out payment reminders so that invoices are automatically followed up on. We also highly recommend connecting payment services to your Xero invoice to get paid even faster! 

 

Step 3. Maintain Detailed Payment Records

Businesses should also keep detailed records of all accounts receivable transactions, including invoices and payments received. This will help them maintain accurate records and track which customers have paid and which still owe money. These records can be used to analyze customer payment trends, identify potential bad debt and take appropriate action when necessary

Xero automatically records payments against invoices when it is paid via connected merchant services. This is especially helpful because our automated follow ups should not go out when a payment has already been applied to an invoice. 

 

Overall, having a strong accounts receivable process in place is essential for businesses to ensure that they are getting paid on time and accurately. By taking the right steps and keeping detailed records, businesses can protect themselves from bad debt and maintain accurate records of all transactions.

 

Not Focusing On Your Clients' Needs

Another common area of leakage is neglecting customer focus. Businesses need to understand their customers' needs and wants if they want to remain competitive and profitable over the long term. This includes understanding who the customer is, what motivates them, what activities attract them, and what products/services best meet their needs. Without this understanding, businesses won’t be able to create effective marketing campaigns or tailor their product offerings appropriately leading to lost revenue opportunities. To prevent this type of leakage, businesses need to make sure they are consistently gathering customer feedback through surveys or interviews so they can stay up-to-date on trends in the marketplace.

 

What is a Net Promoter Score?

The Net Promoter Score, or NPS, is an essential tool for businesses of all sizes. It can help companies get insights into customer satisfaction and loyalty, evaluate marketing campaigns, and improve their products and services. With the right data and analysis, businesses can use NPS to make informed decisions that will lead to improved customer satisfaction and increased profits.

By understanding their customers’ opinions and needs, companies can develop better products and services, leading to greater customer loyalty and satisfaction. NPS is an invaluable tool for any company looking to improve its customer experience and grow its business.

The NPS is based on responses to a single question: How likely are you to recommend this company to a friend or colleague?

The higher the NPS score, the more likely customers are to refer the company. A positive NPS indicates that a company is doing well in terms of customer satisfaction and loyalty. A lower NPS indicates that a company needs to improve its customer experience and services. 

 

Ineffective sales and marketing

Sales strategies that don’t yield results are another common cause of loss in profits for small businesses. Having too many sales channels or ineffective pricing can be a costly mistake if not monitored properly. To counter this type of leakage, it’s important for businesses to evaluate their current sales strategies regularly so they can identify changes that may need to be made in order to increase efficiency and maximize profits.

Additionally, having clear goals around what types of sales channels will work best will help keep a business on track towards achieving its desired results while minimizing losses associated with ineffective methods or tactics.

 

Not Investing In Your Employees' Success 

Finally, investing in employee training is key when it comes to preventing money leakage as well as creating a successful business overall. Investing in training employees on best practices will allow them to better serve customers leads resulting in higher levels of customer satisfaction which translates into increased profits over time. Additionally, having well-trained employees will enable a business owner more time freedom since all tasks would be handled efficiently without any oversight from the owner resulting in lower costs overall.

We use Notion to maintain our internal standard operating procedures, as well as to create and maintain all client-related processes so that anyone working on a file can easily handle their work. There is nothing worse than starting a new job and feeling completely lost. Building this documentation database helps to keep our employee churn low because no one feels overwhelmed or like they cannot handle their work. 

 

By addressing these common areas of profit loss early on, business owners are much more likely to succeed in the long term than those who don’t proactively tackle these issues head-on. Taking these preventative measures will not only help save costs over time but also help improve overall operations by ensuring that all departments remain efficient while still staying focused on delivering quality services or products

 

 

Successful Small Business | Accountingprose

Ensure your success 

Growing a small business is no easy feat, but by maintaining a focus on profitability, you can set your business up for success. By keeping an eye out for key indicators of profitability and leakage in your finances, you can make sure that your business is running smoothly. Finally, invest time and energy into growth strategies that will pay off in the long run. By following these tips, you can ensure that your small business is profitable and sustainable.

 

 

Ready to take control of your small business' profit margins?

Schedule a free consultation today!

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