Understanding how to increase profit margins is critical as a business owner or entrepreneur. Offering competitive prices and quality products while maintaining sustainable profit margins is key. So what is a reasonable or good profit margin for a small business? What is considered good or reasonable profit margins, usually varies depending on the industry and size of the business. It can also depend on the goals of the business and the owner. A tip of advice from a seasoned business owner, never get greedy. Strive for fair. While we love huge profit margins, you should never cut corners to achieve them. Taking shortcuts to produce larger profits will likely catch up with you one day and could cost you. With that being said, as a business owner you should always be searching for ways to increase operating profit margins. Let’s dive into how to increase profit margins and maintain healthy cash flow.
How Do You Calculate Net Profit Margin?
Tracking revenues and cash flows using accurate data is an essential part of knowing what your actual profits are. Oftentimes, small business owners may try to estimate expenses and profits or omit certain activities to make their business appear profitable. While this may help you sleep at night, it’s not a sustainable business practice. If you are trying to drill down profit margins you should be considering all expenses. Net profit margin is the amount of profit your business generates expressed as a percentage of total revenue. Net profit margin should be tracked on a profit and loss statement. Here is a basic formula for calculating net profit margin:
= Gross Profit
Less: Total Expenses
= Earnings Before Tax
= Net Earnings
What Is Cash Flow?
Managing the finances for a business may be more complex than you imagined. While your profits may be higher than your expenses, you may still have cash flow problems. For most businesses, money is constantly coming in and out, this is known as cash flow. At all times, you want to ensure that your business accounts have sufficient balances to cover debits. For businesses required to hold inventory, cash flow may be challenging. In addition, if you are selling products through other platforms or retailers, there may be a lag in payment. So how do you keep inventory stocked without depleting all of your cash flow?
Small businesses often need to use inventory financing to keep cash flow healthy and profits growing. However, inventory financing can take away from the bottom line. In addition, it can be difficult for some businesses to qualify. Small businesses that need affordable and flexible inventory financing should visit Kickfurther. A little later on we will provide more color on how Kickfurther can help your business increase profit margins.
5 Ways To Increase Profit Margins
As a business owner you have a lot of things on your plate to worry about. While you may be able to hire good help, it’s rare to find anyone more committed to your business than yourself. Business owners must find a way to keep an eye on operations without losing sight of what’s best for their business. If you notice that profit margins are suffering, it may be necessary to boost your top line. If your business has a loyal customer base that orders frequently, you may owe them an explanation as to why prices are increasing. Use your judgement here. And remember, customers appreciate communication and should want the business they admire to thrive. Let’s take a look at 5 ways businesses can increase profit margins. . .
#1. Focus on branding and perceived value
Creating personal and emotional connections with customers can help increase profit margins. Why should they choose your product over your competitor? What does your brand do for them? Do you share mutual interests such as focusing on eco-friendly solutions or giving back to charity? There are many brands out there that can sell for higher prices than competitors simply because customers prefer their brand and are willing to pay more for it.
#2. Find ways to increase average order size
Effective marketing and customer loyalty programs can help you increase profit margins. Once a customer arrives in your store, on your website, or on your product, you have probably already invested money to get them to this point. Now, you need to find a way to maximize their spending. For example, you could suggest products that are frequently purchased together or offer free shipping for spending over a certain amount. Online clothing retailers often have suggestions for how to complete your look featuring purses, jewelry, or shoes. Find the solution that works for your business, even if it means plenty of rounds of trial and error.
#3. Be creative with pricing
When consumers purchase products they usually find a few products that meet their needs. One of the last details they may refer to is the price. At this point, the price of your product can often make or break the sale. If you plan to sell at a higher price point than competitors, even if it’s just slightly, you should provide clear reasons as to why a consumer should purchase your product. Consumers often already believe that a higher priced product is higher quality too. In reality, this is not always the case but marketing can sure make it seem like this is the case.
#4. Build relationships with vendors
Vendors and business owners share mutual interests, you are both in business to make money, but you need each other to achieve the goal. Increasing sales and profits could potentially benefit both of you. Vendors and business owners should communicate to find ways to make things more cost-effective for both parties. Working closely with vendors can establish stronger relationships that can increase profit margins.
#5. Be thoughtful about discounting products
Once we find a brand or product we love, we usually wait for it to go on sale. But what happens when the item you are dying to purchase runs out before hitting the sale rack? For some brands, this is a recurring theme that motivates customers to purchase items for full price. If customers know products are likely to be marked down with plenty of supply available, they will probably wait to purchase them on sale. Personalized offers or an annual sale may help move inventory while increasing profit margins. After a customer has built their cart, you could send them a coupon for a small discount. This is tactful and does not advertise to the world that your product can easily be purchased for less money. Furthermore, holding one annual sale, can grab customers’ attention and excite them without taking away from the now. If they love your brand they will likely shop your sale but probably won’t wait to purchase products until then.
What Is An Average Profit Margin For a Retail Business?
In the retail world, average profit margins are about 53.33%. Figuring out an appropriate profit margin for your business can include many variables. First off, you’ll need to determine what you can sell your product for. You’ll also need to determine what you can acquire or make the product for. Don’t forget transportation, storage, and other expenses you may incur. While this sounds pretty simple, it’s not. Determining profit margins and building a competitive business requires creativity, innovation, and dedication. There may be times you want to just give up, but then the voice in your head reminds you of how far you have already come. If you feel defeated, take a step back and hang in there, if it makes sense. If you can be successful, business ownership can be so rewarding.
Profits are important for business. As a business, you are there to make money while satisfying customers. Finding a healthy way to take care of employees and customers while remaining profitable is key for success. Most small businesses need some type of inventory financing, regardless of how established they are. Inventory financing often sounds like an easy answer for stocking products but it can be costly. After searching hopelessly for affordable inventory financing, Kickfurther was founded by an entrepreneur just like yourself. Kickfurther is the world’s first online inventory financing platform that enables companies to access funds that they are unable to acquire through traditional sources. We connect brands to a community of eager buyers who help fund the inventory on consignment and give brands the flexibility to pay that back as they receive cash from their sales. This alleviates the cash-flow pinch that lenders can cause without customized repayment schedules, allowing your brand to scale quickly without impeding your ability to maintain inventory or financial flexibility.