Best Practices for Increasing Business MarginsMay 26, 2017
Poll 100 people in a room and you might get 100 different answers to what the best practices are for increasing your business margins.
Increasing business margins fall into two broad categories: growing revenues and controlling or cutting expenses. The trick, of course, is finding the right balance that will make your business more profitable by boosting sales while controlling costs at the same time.
Each company faces its own circumstances and industry norms. For example, food wholesalers traditionally operate on very thin margins while financial services have wider margins. Often, it depends on circumstances out of your control such as barriers to entry, your competition, the labor market and whether your product is a commodity.
Check out how your industry compares using data published by Aswath Damodaran, a professor of finance at New York University’s Stern School of Business, here. Still, there’s much you can control on both the revenue and expense side of your income statement. Consider some of these best practices for increasing business margins:
For expenses, learn from the chef
Restaurants have notoriously thin profit margins, so there’s a lot we can learn from the successful ones. In a paper published by the Cornell University School of Hotel Administration, one of the top hospitality programs in the world, Professor J. Bruce Tracey outlined useful approaches to controlling inventory costs. You can read the full report here. It’s a great lesson in inventory control:
- Order only what you need. In general, order only the smallest amount necessary. Know what is in your inventory. Regular inventory checks reduce spoilage and theft.
- Always take advantage of competitive pricing. Closely monitor market prices, develop good relationships with vendors and avoid sacrificing quality for price.
- Develop a customized order guide to achieve accuracy and efficiency. This also helps maintain the proper level of inventory. Use purchasing programs that are automated so that you can analyze your costs and ensure guaranteed contract pricing.
- Assign specific employees to inventory receiving to ensure familiarity with the process, check invoices line-by-line and ensure accountability.
Revenues: Learn from Small Business Experts
Controlling costs is just half the battle: boosting sales is key, too. CIT’s Direct Capital asked small-business owners to share their insights into boosting profit margins. You can read the full report here. Here are some nuggets gleaned from that report:
- Consider increasing prices, but carefully and thoughtfully. The majority of customers buy on value, not price.
- Identify the clients who have the most growth potential. Create a written plan for each one and how you might mutually benefit from a closer partnership.
- Build a solid sales pipeline by identifying individuals on your sales team who will target a specific audience. Millennials and Baby Boomers, for example, have different expectations and it’s important to tailor your sales strategy to each audience.
- Get more sales from your existing customers by figuring out what additional products and services they might buy. Don’t forget to ask them to refer your business to others.
Qorval has extensive experience helping companies establish best practices for increasing business margins. Our experts have decades of experience assisting firms in a broad range of industries. To speak with us, please call 239-430-0303.