Small Business Profitability: How to Measure and Constantly Improve it

Making a profit is crucial for a small business that aims to grow and become sustainable. There are specific ways to measure and track whether your business generates adequate profits to support its business plan. As a small business owner, we have everything you need to know to help you maintain and grow your company.

What is Business Profitability?

To know how to increase the profitability of small business ventures, it's essential to understand what it is entirely. The profitability definition is your total revenue minus total expenses. Small business profitability is necessary because it stands for financial success. You are making a profit and, therefore, running a successful business.

Business profitability will impact whether or not your company can grow, secure additional loans from financial institutions, or attract investors. There's simply no way to sustain a company that isn't profitable. If you do not see the success required for a viable business, there are a few things you can do to turn it around.

How to Effectively Measure Business Profitability for your Small Business

So what is a profitable business? What does that look like? First, the fundamentals on how to increase profits for small businesses is to measure it. Business profitability metrics allow you to look at what's working and what isn't and then make necessary changes. You need to look at your numbers effectively through various accounting methods. It's essential to focus on margins and cash flow.

You'll want to look at the sum of all your revenue, less the sum of all your expenses. For example, if you have a revenue of $28,000 for the month and your expenses were $20,000, you have made a profit of $8,000. If you made $28,000 in revenue and costs were $30,000, you haven't made a profit, and you're actually in the negative. If you don't lower your expenses or improve profits, your business will cost you money.

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10 Smart Ways to Improve your Business's Profits

The good news is you can improve your small business profitability in a few ways.

1. Find more customers

Making a profit might mean attracting more paying customers. If you've already cut unnecessary expenses but are still experiencing low profitability, bringing in more money with new customers will help. You may have to spend a bit of money to do this, but you can improve business profitability if you choose the proper marketing and sales avenues.

2. Seek Repeat Sales from your existing customers

Another way to potentially improve business profitability is to retain loyal customers. These customers are already fans of your business, so it's easier to gain stable revenue streams by focusing on creating long-term relationships. You can get repeat sales through personalized email notifications offering special deals to loyal customers.

3. Adjust your pricing

To improve business profitability, you may need to adjust your pricing. Although this usually means lowering your prices, this isn't always the case. Sometimes if your prices are too low, they're considered low quality.

In contrast, you may need to increase your price levels. Since time is money, you must ensure you're not losing money from extra work. Also, you can compare your pricing to your competition by analyzing the value you offer. If you think you can gradually increase your pricing without minimizing your client base, it's time to do that.

Measuring your profitability by breaking down the value you offer based on the time spent to deliver your services is critical for your business growth. The best way to do this is to use time tracking software and monitor the exact time spent on each client, project, or task you are working on. Either way, you don't want to take a guess.

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4. Cut Expenses

Realistically, you will have to do a business profitability analysis and then cut expenses if necessary. This could mean letting staff go that have become redundant or cutting down on office supplies you don't need. There are many ways to cut expenses, so that you may want assistance. Thanks to helpful apps for business, it's easy to track your business expenses regularly and cut unnecessary ones.

5. Focus on margins along with cash flow

When it comes to business profitability metrics, you'll need to look at margins and cash flow. Cash flow will measure cash coming in and operating expenses and allows you to see a percentage of sales revenue daily, weekly, monthly, and annually. It's one of the highly trusted measures of business profitability.

Also, you don't have to waste your time offering products and services with low margins. Instead, high margins will give you higher business profitability and the opportunity to offer occasional discounts to your clients without jeopardizing your business growth.

6. Do more with Less

Small business profitability relies on automating business processes using technology. This alleviates a lot of time and human resources, saving you money and potentially increasing business profitability. There's also less potential for human error. Many apps that can help your business are reasonably priced and reduce expenses.

7. Boost Employee Efficiency

Another way to improve business profitability is to evaluate how much time your employees need to deliver your products or services and adjust processes to increase productivity. This can be done with time tracking, where you can find possible drawbacks in the working processes and make the appropriate adjustments.

8. Add new products or services

Small business profitability goes hand in hand with business growth. People's needs change, so your business should grow toward those needs. This means adding new products or services for business profitability. Every time you add something new to your business, it brings excitement to your loyal customers, and there's an opportunity to increase sales by cross-selling or upselling.

9. Invest in Digital Marketing

Your small business profitability relies on exposure to potential customers. To ensure you're visible to the world, one of the best ways to do this is to invest in digital marketing. Create a brand and regularly post on social networks. You can hire someone to create engaging business posts and run other online campaigns. Engaging with your target audience is one of the most effective ways to increase business profitability.

10. Plan your yearly budget wisely to secure your cash flow

Undoubtedly, cash flow is essential for your business growth! You wouldn't want to run out of money while your business expenses run high throughout the year. This is why planning your yearly budget wisely is critical. You need to know your liabilities not only for the next month but also for the next quarter or two to ensure that your cash flow will be adequate and your business will stay profitable.

If this is your first year running out of your business, you should make an overall projection on your startup expenses and keep some money aside for possible hidden costs. On the other hand, if you've been running your business for a few years already, it would be beneficial to use expense management software and consult it at the beginning of the year when you need to define your annual budget plan. Most probably, you may suffer from frequent fluctuations in cash flow throughout the year. Software like Elorus will help you find specific trends in your liabilities and be prepared for a possible cash level dip.

To sum up

Checking profitability is crucial for your business's sustainability and growth. Using software like Elorus, you could be able to track your sales, expenses, payments, and other valuable metrics using premade financial and business reports.