Common sources of trouble
Here are four trouble spots you should investigate.
1. Insufficient revenue
Are your revenues enough to cover all your expenses and produce your desired profit? If not, why not? A possible reason is you’re in the start-up phase of your business or have just launched a new product line.
If this is the case, it’s important to be realistic about how long it will take revenues to catch up to costs. You may have to endure losses for one or two years—perhaps even longer. To do so, you will need money from savings, financing or an investment to tide you over.
On the other hand, an established business may be running at a loss because its revenues have recently declined. It’s important to quickly determine the specific reasons and address them.
2. Inappropriate pricing
Do your prices cover your costs? Unfortunately, many entrepreneurs don’t know for sure.
It’s common for small businesses to price their products and services based on what the competition is charging. But that could be a mistake.
It’s important to know all your costs and your desired return on capital, and to take these into account when you set your prices. It isn’t necessarily bad for your prices to be higher than those of your competitors. In fact, this is perfectly appropriate if your strategy is based on differentiation—offering a unique or specialized product.
A growing number of businesses use estimating software to take the guesswork out of making job bids that better reflect their costs. The software takes into account labour, overhead costs, the price of material and other expenses as well as your targeted profit margin, ensuring that every job is profitable.
Are you as efficient as you could be? Benchmark your business against others in your industry and determine how well you’re doing relative to your competitors. You may find that wasted resources are costing you dearly.
You can always find ways to improve your operational efficiency and reap the reward on your bottom line. One way is to boost productivity with the many user friendly and affordable technology tools now available.
4. Low margins
Do you know the profit margin for each of your products or services? Analyzing each one separately can be an eye opener and may reveal problems that you hadn’t noticed. Products that aren’t doing well may be dragging down your bottom line and cash flow, as well as diverting management focus from higher margin products.
Instead of just chasing more sales, chase profitable sales. Dumping losing products will likely speed up inventory turnover, freeing up cash and floor space so that you can generate more returns.
Take action now
If any of the trouble spots sound familiar, you should take action as soon as possible. Don’t hesitate to consult outside experts for advice.
You can also consult our free eBooks. In Master Your Cash Flow: A Guide for Entrepreneurs you’ll discover proven ways to better manage your finances. In Create a Leaner More Profitable Business: A Guide for Entrepreneurs, you’ll learn more about operational efficiency.