In order to thrive, product-based small businesses must have a healthy bottom line. Have you recently taken a long look at your company’s financials and realized that its overall profit is much lower than you expected?
Even though your business is making a ton of sales every month, the numbers don’t lie — profits may be much lower due to the money your company has to shell out each month for payroll, manufacturing costs, and other overhead expenses. This can be quite frustrating for any entrepreneur.
Now you may be thinking, “How exactly can I increase profits without having to make massive changes in operations? Is there a way to grow net profit without the need for more sales or marketing outreach?”
In my experience as the CEO and founder of CMA Exam Academy, a Certified Management Accountant exam review program, I’ve discovered these simple-yet-effective ways a product-based business can increase its monthly profit.
Prepare Your Budget Now to Save Later
Your profit may be much lower than you expected because you never set up a budget, or you set one up at the beginning of the year or quarter and then forgot about it. Don’t let this be the case any longer!
Your monthly budget is your guidebook. Take the time to create a spreadsheet that lists exactly which costs are needed for each month’s operations, including subscriptions for your CRM and sales management software, payroll, manufacturing essentials, etc. Include every single cost, no matter how small. Better yet, use accounting software to track all of it.
After you prepare your budget, compare it to your actuals. You may have written down the monthly overhead costs in your budget so they are set in stone, but your actual expenses could be much higher (especially if you’re not paying close attention).
So take your last month’s financial statement and review the expense line items to identify the largest variances. For example, you may discover that the costs of office supplies or cloud-based file storage are higher than budgeted. Once you note these discrepancies, you can make changes to ensure actual expenses match your budget.
Look for Waste in Production
You may be completely unaware of the waste that occurs throughout your production process. For example, a process you use to manufacture products may result in a lot of wasted materials, which can be costly and lower your overall profit.
The ultimate goal is to lower or eliminate waste altogether. Assess all of your production processes to pinpoint any waste and consider changes that can be made. Even a small adjustment in the process or sourcing of raw materials could drastically reduce the waste.
Waste can also refer to costly, unnecessary manpower for an inefficient process. For example, if you have several people working on one element of the production process when you only need one person. In this case, the extra manpower is a wasted cost — it can even lower the overall efficiency of the entire process.
Negotiate Contracts with Vendors
Do you work with an array of vendors whose products are used to create your final offerings? For example, do you purchase bulk materials from several sellers to create your business’s products and then buy packaging supplies from another vendor? If so, see how you can negotiate with them to get the best prices for these items. Here are a few ways you can do this:
Request Discounts for Early Payments
Every business owner wants their invoices paid on time to improve cash flow management. Therefore, see if your vendors would be open to a discount for early invoice payments. Even if it’s a small discount, it can add up to a ton of savings over the long run.
For example, if you buy $4,000 worth of materials each month from one seller, a 5% discount for early payment will save $200 a month. If you secure early payment discounts with every vendor, all of the savings would add up and increase your monthly net profits.
Negotiate Volume-based Pricing Rates
Ask your current vendor and reach out to their competitors to inquire about pricing options and then compare rates. If competitors offer the same materials for better prices, ask current vendors to match their prices. If they are not, consider switching vendors that offer the same level of customer service and quality — even if the pricing difference is only $50 a month. You could end up saving $600 a year. Always consider the long-term savings.
To Wrap It All Up
Increase your business’s net profit by preparing and reviewing your budget now to save through the year. On top of this, assess your production processes to eliminate costly waste and try to negotiate with your vendors. Following these simple-yet-effective steps may help you save a lot of money, boost net profits, and improve your company’s overall bottom line.
Nathan Liao is the founder of CMA Exam Academy, a top Certified Management Accountant exam review program. As a CMA and CMA coach, Nathan mentors accounting and finance professionals in over 80 countries to earn their CMA certification in as little as 8 months. The unique review framework in CMA Exam Academy has proven to be the key to his students’ outstanding success in attaining their dream of earning the Certified Management Accountant certification.
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