Most business owners desire profitability, but is this something we must leave to luck and chance? Or rather, is it something we can influence by implementing certain strategies?
If income is revenue generated by your business's activities or sales, and expenses are the costs incurred to run your business, then your profit is your revenue minus your expenses. You can then go on to measure your profitability—and determine whether your profit is healthy or unhealthy—through a profit margin ratio (calculated as revenue – expenses/revenue). Although what constitutes a “good" profit margin depends on your industry, many successful businesses have profitability above 11 percent.
It's critical to take steps to improve your business's profitability, because such actions could mean the difference between short and long-term survival. My recommendations include understanding how your business spends time and money, using software tools and apps to manage performance, reviewing your pricing and others', considering online systems and automation, focusing on the best service and leveraging cash-flow flexible solutions, like the new metal American Express® Business Gold Card.
Understand How Your Business Spends Time and Money
As the owner, you should have a solid handle on every one of your business's costs. Note that when you're trying to increase profitability, knowing your general expenses in a certain category usually doesn't cut it. Where exactly are your payments going, and, as an example, what's the business or operational benefit of using one vendor versus another? You should also track how you and your employees are engaging in the business. In many cases, time is profitability, so calculate the hours you spend directly generating revenue and the number you spend on administration. And, if you understand your spending habits, you can leverage them to receive future rewards and discounts. For instance, the Business Gold Card features the Membership Rewards® program. You can earn 4X Membership Rewards® points on the 2 categories where your business spent the most each billing cycle from the list below, plus earn 1X on other purchases.
- Airfare purchased directly from airlines
- U.S. purchases for advertising in select media (online, TV, radio)
- U.S. purchases made directly from select technology providers of computer hardware, software, and cloud solutions
- U.S. purchases at gas stations
- U.S. purchases at restaurants
- U.S. purchases for shipping
Terms and Limitations apply.
4X points applies to the first $150,000 in combined purchases from these 2 categories each calendar year Then earn 1 point per dollar.
While it's important to compete and know your market inside and out, be careful not to undercharge for your products and services and only offer discounts if they will improve order size and therefore overall revenue
You don’t have to pick categories. Reducing business expenses and redeeming Membership Rewards® points can help boost your bottom line. Points can be redeemed for booking travel on amextravel.com to rewarding your staff with retail partner gift cards.
Use Software Tools and Apps to Manage Performance
Whether you have official supplier and employee performance evaluations or not, you should insist that everyone involved in your business contributes to its growth. This means that you tie employee salaries and bonuses to revenue targets, and only use suppliers that consistently prove their value. If an individual or company isn't pulling its weight, find another way. You especially have to keep your eye on vendors like marketing firms, whose results are often difficult to quantify. Fortunately, expense management software tools can help with this type of analysis. For instance, the Business Gold Card includes the Spend ManagerSM Mobile App, which provides year-end spending summaries, receipt organization and transaction matching for business purchases.
Furthermore, if you spend loads of time on manual business processes involving resource allocation, billing, inventory management and sales tracking, your profitability may be taking a significant hit. Accounting software like QuickBooks can drastically cut the time required to run your business through automation and anytime/anywhere access, but it also can decrease paper waste and your business's carbon footprint. The Business Gold Card includes Connect to QuickBooks® so that you can enroll to connect your American Express online statements directly into your QuickBooks account. Just make you vet any business innovations with similar companies before resting your profitability on them.
Review Your Pricing and Others'
Getting lazy about pricing can spell disaster for profitability. While it's important to compete and know your market trends inside and out, be careful not to undercharge for your products and services and only offer discounts if they will improve order size and therefore overall revenue. And, on the other side of the pricing issue, pay attention to supplier price escalation and negotiate wherever and whenever possible.
Focus on Delivering the Best Service
You've likely heard that it's easier to keep an existing customer than recruit a new one. You can help enhance your profitability by prioritizing stellar customer service over risky, expensive and time-consuming business development initiatives. While some lead generation is essential, going out of your way to please loyal customers can drive greater revenue through repeat (and often continuous) business and referral sales.
Leverage Cash-Flow Flexible Credit Solutions
Many businesses use credit, but maximizing how and when you pay may positively impact your profitability. When selecting a card, look for the option to pay in full or pay over time depending on cash flow. This will provide you with the flexibility to maximize opportunities when they come up or pull back on payments when you need to. When using the Business Gold Card purchases of $100 or more are eligible to be paid over time, up to the amount of your Pay Over Time limit on your account. You can choose to pay for these purchases over time with interest or you can pay your full balance—whichever is best for your business.
When you have the right knowledge and information at the right time, profitability is more of a science than an art. As your business grows, systematize these steps so that your profitability expands with it.
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