Archive for the ‘profit’ category

Strategies for Thriving in a Tough Economy

August 8th, 2022

Whether or not you believe we’re heading into a recession, or even if you have come to believe that what we have now is pretty much as good as it’s going to get, there’s no getting around the fact that we’re experiencing poor economic times. An enduring lack of consumer confidence and decreased sales threaten all businesses, but small businesses are particularly vulnerable as they often don’t have the reserves to help them survive difficult times.

Entrepreneurs who are survivors will look at this as an opportunity to improve their business practices so they can not only weather the tough times, but thrive during them. How, then, can you recession-proof your business? Thinking through the following practices and how you can make them your strategies will help ensure your business’s success in a tough economy.

1. Protect your cash flow

To keep your business healthy, cash needs to continue flowing through it. As long as your business exists, you will have expenses. But the harder times get, the harder it can be to keep the cash flowing into your business. Be more diligent in how you are spending money. It’s important to be frugal and aware of your income and expenses. By doing a line item cost for each expense, you will be able to identify areas that need greater attention. Efficient cash flow management is crucial. The sections below are all, for the most part, areas that will have impact on your cash flow, but take special note of the ones regarding evaluating your vendors, reviewing your inventory management, and keeping your personal credit in good shape.

2. Streamline your business practices

This is an opportune time to review your business procedures for effectiveness. Consider areas that can be combined into one. Consider areas that can be structured differently to reduce costs. Think about sharing resources, like administrative or payroll work, with other entrepreneurs to reduce overhead. The goal is to streamline operations so you can still provide a quality product or service, yet realize a greater profit by reducing the expenses to produce it.

3. Evaluate your vendors

If you use vendors for packaging, labeling, distribution, or in other areas of your business, this is a good time to do some price comparisons. There is a lot of competition among vendors to attract new business, so you could realize some serious savings in this area. Since no one wants to lose business during a bad economy, chances are good that your current vendors will meet the competitor’s price. If not, it’s time to move your business to the lowest bidder, just as long as you’re not sacrificing quality.

4. Review your inventory management practices

See what can be done to reduce inventory costs without sacrificing the quality of goods or inconveniencing customers. Are you ordering too many of particular items? Can an item be sourced somewhere else at a better price? Is there a drop-shipping alternative that will work for you, eliminating shipping and warehousing costs?

Just because you’ve always ordered something from a particular supplier or done things in a particular way doesn’t mean you have to keep doing them that way, especially when those other ways may save you money.

5. Focus on your core competencies

A diversification strategy is often recommended for small business success. But too often small business owners simplify the concept of “diversification” to “different”. Just adding other products or services to your offerings is not diversification. It’s potentially just a waste of time and money. Worse, it can damage your core business by taking your time and money away from what you do best. It may even damage your brand and reputation. If you have diversified out into different areas over the years to improve market reach, it might be time to regroup and focus on the core of your business and outsource the rest. Evaluate what is and isn’t working and put more effort into what started you out as a successful entrepreneur in the first place. It’s important to get in touch with your core business and make sure it continues to meet the changing needs of customers. So consider dropping the extras and focus on what you do best and which is most profitable to recession-proof your business.

6. Develop and implement strategies to get your competition’s customers

If your small business is going to prosper in tough times, you need to continue to expand your customer/client base. If you have competitors, then they have customers. So, there are already people out there buying what you sell, just not from you. What will it take to attract those customers? You’ll need to offer something more or something different. Research your competition and see what you can offer to entice their customers into becoming your customers. It’s not only lower prices or a better price/quality trade-off that gets the business. Providing better customer service is often identified as one of the easiest ways to outdistance the competition. But you need to do the research in your own market to find out what it takes to be the customer’s first choice.

7. Make the most of the customers/clients you have

They say that a bird in the hand is worth two in the bush. The bird in the hand is the customer or client you already have. These customers are an opportunity to make more sales without incurring the costs of finding a new customer.

Even better, he or she might be a loyal customer, giving you many more sales opportunities. If you want to recession-proof your business, you can’t afford to ignore the potential profits to be had from established customers. But remember that your customers are going through tough times too. In order to retain their business, implement measures to express your appreciation. This could be a one-time price reduction, a customer loyalty card, or a referral incentive. Whatever the strategy may be, it should be something of value to the customer and within your marketing budget.

8. Continue to market your business

In lean times, many small businesses make the mistake of cutting their marketing budget to the bone or even eliminating it entirely. But lean times are exactly the times your small business most needs marketing. Consumers are restless and looking to make changes in their buying decisions. You need to help them find your products and services and choose them rather than others by getting your name out there. So don’t stop marketing. In fact, if possible, step up your marketing efforts.

9. Keep your personal credit in good shape

Hard times make it harder to borrow and small business loans are often among the first to disappear. With good personal credit, you’ll stand a much better chance of being able to borrow the money needed to keep your business afloat if you need to. To recession-proof your business, keep tabs on your personal credit rating as well as your business one and do what’s necessary to keep your credit ratings in good shape.

There’s absolutely nothing that will make your small business one hundred percent recession-proof. But implementing the practices above will help ensure your small business survives tough times and might even be able to profit from them.

Sole Proprietor Start-Up Tips

August 4th, 2022

When starting a new business, many aspiring entrepreneurs will launch it as a side venture to their current career employment, a.k.a. their day job. So there may not be a big rush to create a complex and expensive legal entity such as a Corporation. In many situations a simple sole proprietorship is the most appropriate way to go.

KISS

Keep it simple starting out. The simplest form of entity for running your new business is a sole proprietorship. This form of ownership requires no special communication or filings to the Internal Revenue Service until you start paying employees and/or taxes.

Sole Proprietor

As a sole proprietor you are the owner of a business that might only need a business license/permit if your county or city requires it. If you are the owner of a business that sells items that require sales tax, you will need a reseller permit, and are liable to remit all state and/or city taxes on retail, and maybe wholesale, sales your business collects. Service businesses and most cross state sales are exempt from state sales tax.

Liability Insurance

If you are concerned about personal liability, then the simplest thing to do is to buy a personal liability umbrella policy. Additionally, the best way to avoid liability is to learn your trade well and keep accurate accounting records.

No Company Taxes, Just Yours

Profit from a sole proprietorship is reported on your personal tax return. The IRS won’t even know your company exists until after you file your first personal income tax return. This will include a Schedule C which reports all of the revenue and expenses your business has incurred. In most states, including California, certain state minimum taxes are not require of sole proprietorships. You will, however, have to pay any sales tax you have collected from your customers. And since sole proprietorship losses will offset income from you day job, you might even receive a tax refund. So concentrate on building your business, not communicating with the IRS

Just a Personal Bank Account Will Do, But Don’t

Although advisable as a sound business practice, you are not required to have a separate bank account which is a necessary compliance for a LLC or Corporation. As you get your business set up you could pay your startup costs out of your personal bank account, but once you’re in business and making sales, file a Fictitious Business Name Statement and use the paperwork to open a business bank account. Keep complete and accurate records so you can be sure to get the best possible tax advantage from those early-stage costs, and not get them mixed up with your personal expenses.

Simple to Start, Simple to End

Over 85% of small businesses fail or change ownership within the first five years. Plan your business to thrive but if it fails as a sole proprietorship, you simply stop doing business. No communication or special forms with the IRS, no additional taxes to get your investment returned and no high accounting fees to close out your company. Just mark the Schedule C in your next personal tax return as “final”.

Getting Paid

In a sole proprietorship you just take the money out as a draw. No payroll taxes or quarterly forms needed. Many startups lose money for the first year, and maybe longer, so keep your day job to pay your living expenses.

Evolving Beyond the Sole Proprietorship

As your business becomes profitable talk with a CPA about another entity type that might save you taxes. Just a simple bookkeeping entry transfers all of the business assets from the sole proprietorship into the new entity without any tax penalties.

Gross Profit, Profit Margin & Markup, OH MY!

April 27th, 2015

Gross Profit, Margin & Markup

The terms Profit Margin and Markup are often used interchangeably to mean Gross Profit Margin, but they are not the same. A clear understanding and application of these concepts and calculations can provide the information you need to better impact your bottom line.

First of all, a very valuable calculation you’ll want to perform for understanding your business is Gross Profit, and then, the tool that you use to maintain gross profit, called Markup.

The gross profit on a product is:

Sales – Cost of Goods Sold = Gross Profit

To understand gross profit, it is important to know the difference between the expenses we call Cost of Goods Sold and the expenses we call Operational Costs.

Cost of Goods Sold are those expenses that are incurred as a direct result of producing the product. They tend to be variable costs such as:

  • Materials used
  • Labor directly involved in production
  • Sales commissions
  • Packaging
  • Freight
  • Utilities, or power costs, for production equipment and or facilities
  • Depreciation expense on production equipment
  • Machinery

Operational Costs are the more fixed costs such as:

  • Rent
  • Insurance
  • Professional fees
  • Office expenses such as supplies, utilities, a telephone for the office, etc.
  • Salaries and wages of office staff, salespeople, officers and owners
  • Payroll taxes and employee benefits
  • Advertising, promotion and other sales expenses
  • Auto expenses

While the gross profit is a dollar amount, the gross profit margin is expressed as a percentage (Gross Profit as a percent of Sales). It’s very important to track since this allows you to keep an eye on profitability trends. This is critical, because a business can get into financial trouble with an increasing gross profit that coincides with a decreasing gross profit margin.

The gross profit margin is computed as follows:

Gross Profit / Sales = Gross Profit Margin

There are two key ways for you to improve your gross margin. You can either increase your prices, or you can decrease the costs to produce your goods. Or both, if you can.

An increase in prices can cause sales to drop. If sales drop too far, you may not generate enough gross profit to cover operating expenses. Price increases require a very careful reading of inflationary rates, competitive factors, and basic supply and demand for the product you are producing.

The second method of increasing gross profit margin is to lower the variable costs to produce your product. This can be accomplished by decreasing material costs, or making the product more efficiently.

Volume discounts are a good way to reduce material costs. The more material you buy from a supplier, the more likely they are to offer you discounts.

Another way to reduce material costs is to find a less costly supplier. However, you might sacrifice quality if the goods purchased are not made as well.

Whether you are starting a manufacturing, wholesale, retail or service business, you should always be on the lookout for ways to deliver your product or service more efficiently.

And all the while, you also must balance efficiency and quality issues to ensure that they do not get out of balance.

Let’s look at the gross profit of Rapid Printing & Copy Company as an example of the computation of gross profit margin. In Year 1, the sales were $1 million and the gross profit was $250,000, resulting in a gross profit margin of 25 percent ($250,000/$1 million). In Year 2, sales were $1.5 million and the gross profit was $450,000, resulting in a gross profit margin of 30 percent ($450,000/$1.5 million).

It is apparent that Rapid Printing & Copy earned not only more gross profit dollars in Year 2, but also a higher gross profit margin. The company either raised prices, lowered variable material costs from suppliers or found a way to produce its print jobs more efficiently (which usually means fewer labor hours per product produced).

Rapid Printing & Copy did a better job in Year 2 of managing its markup on the products that they print.

Business owners sometimes get confused when relating markup to gross profit margin. They are related in that both computations deal with the same variables. The difference is that gross profit margin is figured as a percentage of the selling price, while markup is figured as a percentage of the seller’s cost.

Markup is computed as follows:

(Selling Price – Cost to Produce) / Cost to Produce = Markup Percentage

Let’s compute the markup for Rapid Printing & Copy Company for Year 1:

($1 million – $750,000) / $750,000 = 33.3%

Now, let’s compute markup for Year 2:

($1.5 million – $1.05 million) / $1.05 million = 42.9%

While computing markup for an entire year for a business is very simple, using this valuable markup tool daily to work up price quotes is more complicated. However, it is even more vital.

10 Accounts Receivable Best Practices

April 22nd, 2014

accounts receivable cartoonProper cash flow management is always important for any organization. One of the most common causes of cash flow problems is poorly managed accounts receivable. Don’t assume that just because a customer purchased your product or services that they will pay you in a timely manner, or at all.

Slow paying customers may require you to draw down your cash reserves, or increase the amount of financing you need to cover your operations. As delinquent accounts get older, the probability of collecting those accounts diminishes. And of course, the more cash you have tied up in receivables, the less cash is available for running your business.

For charities and not-for-profits, slow collection of donation pledges and annual membership dues can put a strain on cash flow. While donations and membership dues are not technically accounts receivable, many of the same best practices can be applied to accelerate collections from your funding sources. Awareness of accounts receivable best practices becomes even more imperative not-for-profit organizations engaging in the sale of products and services to increase funding.

Follow these 10 best practices to improve the receivables process, which should improve cash flow and strengthen the bottom line:

1. Email Invoices
This will ensure your customers receive your invoices immediately, avoiding mail delays. Confirm with your customers which email address they wish you to send invoices to.

2. Shorten Payment Terms
In the days of paper invoices and checks, it was fairly common for businesses to extend credit to customers to allow for mail and payment delays, by granting credit terms, for example “Net 30”. However with the widespread adoption of email communication and electronic payment methods, businesses are now more commonly specifying “Payment due upon receipt”.

3. Have EFT and Other Payment Options
An increasing number of businesses are now paying their suppliers using Electronic Funds Transfer. By specifying on your invoice that payment may be made by EFT, you will enable your customer to deposit payment directly to your bank account. Simply include on your invoice your EFT banking information; bank, branch and account number. Also consider using PayPal and/or credit cards.

4. Establish Credit Policies
If you were going to extend a customer credit, it would be a good idea to assess their ability to pay. The expense of performing credit checks may be more than worthwhile for many businesses.

5. Review Accounts Receivables Regularly
Track the aging of your receivables, and systematically follow-up on any accounts that are past due more than a predetermined number of days. A good practice is to run an aged receivables report from your accounting system on a weekly basis, paying special attention to any receivables that are over, for example, 20 or 30 days old.

6. Use the Telephone
Follow-up unpaid invoices with a phone call if payment has not been received within a reasonable period. Written collection letters and even emails are usually less effective as they do not engage the customer in conversation. The fastest way to find out if there is a problem with a payment is to speak with your customer. Solving the problem in a manner that maintains a good customer relationship is also more likely if there is such a conversation.

7. Maintain a Collections Record
For each over-due account, keep a log of when follow-up calls or emails were sent, along with a record of customer’s responses to follow-up calls. Knowing that, for example, your customer promised to make a payment by a certain date will be invaluable if additional follow-up calls are required.

8. Offer Discounts for Early Payment
Payments are often made first to companies that offer discounts. The popular 2%/10, net 30 Days Terms means that if a customers pays within 10 days they receive a 2% discount, with the total due in 30 days. Try 2%/10, Net 20 Days. A customer may be less inclined to forgo a discount when the payment is due in only 10 more days anyway.

9. Use a Factoring Service
Using a factor is like selling your receivables to a third party at a discount. The costs involved with this method may be justified by greatly improving your cash flow, especially if you have a long collection cycle.

10. Use a Collection Agency
If you are unable to collect, you should submit the account to a collection agency. No one can guarantee to collect your outstanding receivables, but these companies tend to be very aggressive, and since they tend to charge based on the amounts they collect, this is a viable final option. Don’t expect to see any new business from these customers, but then they aren’t the kind of customers you want anyway.

Managing your accounts receivable is normally pretty straight forward as most customers pay on time. However, collection problems can be avoided, or at least minimized, with a strategy that considers the above best practices.

Set Your Prices by Knowing Your Costs

January 20th, 2014

It seems like a simple fact of business; to turn a profit your prices have to be higher than your costs. Is it really as simple as just adding some percentage to your costs to make your company profitable? Actually, it is. The hard part is determining your true costs.

With product-based businesses, setting prices starts with a markup on the product costs. Service businesses can start with a markup of an hourly rate, for the employees and/or owners providing the services to the clients. Those costs should be starting points, but many new business owners use these alone as a basis to set prices. For many new small-business owners, figuring out the complete costs of what they’re selling can be difficult. However, not knowing the true costs can result in underpricing products and services.

The price floor is the absolute minimum at which you can set your prices without sustaining losses on each sale. The price ceiling is the absolute maximum price the market will bear. The price you charge for your products or services will fall somewhere in between.

Here’s what your price needs to cover:

  • The immediate cost of what you’re selling
  • A portion of your selling and general expenses
  • A reasonable profit left over for you

Include every component of your cost-of-goods-sold as you work the numbers for a product-based business. For a service business, use a reasonable hourly rate as your starting point; for yourself (if you’re not counted as an employee) and remember to add on the costs of benefits and employment taxes. Pull the selling and general expenses right off your profit and loss statement; if you have figures from two or three periods to work with, take an average. As for your desired net profits, add on a reasonable percentage for your industry. For example, someone selling original artwork could expect to see a higher profit percentage on each individual sale than could someone selling one-size-fits-all rubber noses.