With customer confidence faltering and overheads rising, there has never been a more important time for small businesses to focus entirely on their bottom line.
Even for those companies that have seen good revenue growth, keeping an eye on profits is essential. Understanding how profitable your business can be while identifying the areas that may limit its earning potential is critical.
In an ideal world, small businesses should be focused on their profits from day one. As difficult as it is to manage the various roles in your business, focus on profit should be at the top of your list.
Key figures to focus on
When you want to maximize your earning potential, you need to focus on key figures that will help you track and improve the underlying health of your business.
Your margin is the percentage of the profit you will – hypothetically – make when you make a sale. The margin you achieve is important because it is the building block of your profitability. While the appropriate margin will vary depending on your product type and sales model, anything below a margin of less than 50% will make profitable growth difficult.
Product brands should also consider whether they want to start a wholesale career at some point. If they plan to sell their products through other retailers, they need to make sure the margin they get is high enough to support that. In that case, they should aim for more than 65 to 70% in retail to have enough margin for wholesale sales.
Your Out Margin
This is an often neglected part of tracking your earning potential. Why? Because it’s a bit more challenging to pin down the numbers. Your in-margin represents how much you would theoretically earn if the product sold at full price. Your out-margin takes into account any promotions or sales, and it’s recommended that you track this monthly.
If you consistently discount, always run sales, have clearance events, general discounts, or have an overly generous welcome discount, these are all ways you can erode your margin. If you follow it regularly, you can easily identify the problem areas.
Is your inventory productive?
How soon do you get your money back after you pay it out to buy stocks? Is it instantaneous, giving you healthy cash flow? Or can products remain on the shelf for a long time? Understanding which products affect your cash flow is an important element in knowing your company’s earning potential.
One of the ways to measure inventory is to know how many weeks you have at any given time — if you were selling at the current rate of your average weekly sales, how many weeks would your inventory last. Then determine your sweet spot – you don’t want your most popular products to sell out and you don’t want slower inventories to drain your business.
It’s also important to understand that not all inventory is created equal and when retailers dig into the data on their inventory, there is so much potential to make changes to improve profit potential.
How much does your business cost you?
Once you understand more about your margins and your inventory, retailers need to know what running their business really costs them, in other words, what the fixed and regular costs are.
Staff, facilities, utilities, postage, fulfillment, packaging – the list is long, but one that all small business owners should know and follow in order to ultimately have a cost-effective plan to know what level of sales they need to cover their fixed costs. to cover.
Knowledge is power and the more you know about your business, the more you can ensure it is resilient and profitable. The time spent assessing and refining the profitability of your business is immensely valuable.