If you want to create a profitable business, it’s important to stop worrying only about gross sales. A profitable small business can be worth more than a large company surviving on its top line.
Focusing on net sales (not gross sales) and profitability matter most.
For example, Uber is an utterly unprofitable company. The company’s gross bookings for Q2 2021 grew by 114%, yet they had an adjusted EBITDA of -$509 million. Uber’s focus on growth is unsustainable for a small business because the company can’t find profitability.
When you create a profitable small business, you don’t have the luxury of being a publicly traded company that can lose millions as long as its revenue grows.
5 Steps to Create a Profitable Business
1. Analyze Up-to-Date Financials
Business decisions shouldn’t be taken lightly. If your business is up and running, you have data to refer to when making decisions: your financials. You should always have your last quarter’s financials at your disposal, as well as your most recent month’s estimates.
Financials help you make smart business decisions. If you don’t know how many sales you’re making, your profit margins or cash flow, you can’t make well-informed decisions.
Work with your accounting team to run financial reports, and even work alongside an advisor that can help you better understand the health of your business based on these financials.
2. Focus on Cash Flow
Cash flow is one of your most important metrics to follow. When you have positive cash flow, you’re making more money than you’re spending. High cash flow helps you avoid taking out costly loans while also allowing you to:
- Hire new employees
- Buyback stock
- Invest in equipment
- Create new products
- Pay employees on time
Businesses need liquid assets to continue growing. However, you also want to maintain some cash in reserves so that when business slows or you go through challenging times, you have the finances to withstand slow periods.
If you’re struggling to maintain positive cash flow, you must question why.
A few of the main reasons businesses don’t have positive cash flow are:
- Accounts receivables not being collected
- Invoice delays either being sent out or being paid
- High overhead expenses
- Overstocking products
- Low profits
- Not having a plan in place to manage cash flow
Examine what’s going on with your cash flow and how you can increase it if it’s low. You can also use this information to change your invoice terms. For example, if a client pays their invoice in net30, you might offer a 1% discount.
However, if the invoice isn’t paid in net60, you can implement late fees into the invoice.
3. Benchmark Your Revenue and Overhead Percentages
Run a benchmark to understand your revenue and overhead percentages versus your industry competitors. Benchmarks are vital because they empower you to make smart business decisions.
In the ideal world, you’ll have the highest revenue and lowest overhead percentages.
However, if your revenue is lower and your overhead percentages are higher than the industry average, it’s time to make changes.
Adjust Your Product / Service Accordingly
First, consider your product or service prices and make adjustments accordingly. Traditionally, businesses will raise prices to boost revenue and reduce overhead. However, if forecasts show that raising prices will cause you to lose customers, you can:
- Try and negotiate deals with suppliers
- Assess ways to reduce product or service costs
Benchmarks provide insight into your business, and they can help you understand where you stand in the industry in terms of pricing, costs and revenue.
You can also run benchmarking on other aspects of your business, such as customer service and efficiency. When you have benchmark data to analyze, you can create clear goals for your business, uncover new opportunities and even improve business sales performance.
4. Consider Your Tax Planning
Tax planning is going to be very important, but it’s not everything. For example, many businesses want to pay $0 in taxes, but this isn’t always a good decision. In fact, we’ve written an entire blog post on why focusing on just tax planning can lead to failure.
We recommend working with an accounting firm and following smart tax planning strategies, but this is a job to hire a professional for instead of doing it yourself.
When you focus on just tax planning, you’ll:
- Spend money unnecessarily to increase expenses
- Stray from your goals
Growth can come from some of these increases in expenses, but often, you’re spending money for the sole reason of saving money on your taxes. Sit down with a tax professional to make the right tax planning decisions that keep your taxes low while still maintaining positive cash flow.
5. Meet With and Update Your Team
If you’re launching a new product or trying to boost sales, sit down with your most valuable asset: your team. You need to create a plan together that allows you to reach your goals, and you need to explain to your team:
- What expectations you have for them.
- Daily, weekly or monthly goals.
To create a profitable business, you need your entire team on board. However, you need to take additional steps to build a team that is efficient and meets your business demands. A good way to build this dream team is to:
- Create guidelines for your team to follow that are written down and available for everyone to access.
- Train your team members on how to do their job efficiently and effectively.
You can cultivate a positive work culture where employees want to come to work every day and reach their goals. Show your team that you value them, share the business’s achievements with them and you’ll build profitability in the process.
Creating a profitable business is a lot more than just beating revenue numbers every quarter. When you create a business that people love, you need to have positive cash flow, a dedicated team and to use your financials to make decisions.
If you’re just focusing on your business’s top line, you’re putting your company at risk of failure.
The tips above can help you improve profitability, reduce the risk of overleveraging your business and take advantage of opportunities that can help propel your growth.
Would you like support in growing a profitable business people love? If so, we may be a good fit to help! Click here to book a call with us to discuss how to make your business profitable.Tags: create a profitable business