As an entrepreneur, you’re always looking for ways to increase your income. And one of the best ways to do this is by increasing your company’s profit margin. Sounds pretty obvious – but how do you do it?
The ‘Why’ of Profit Margins
It doesn’t take much to calculate your company’s gross profit margin. Even though it’s simple, it has profound effects on your personal and professional viability.
Gross profit margin is basically your net sales less your cost of goods sold, divided by your net sales. It’s a measurement of your profits in relation to your revenue. The figure reflects what percentage of every dollar earned is retained as profit.
You don’t have to dig very deep to understand why profit margins matter. However, as a business owner and entrepreneur, there’s also a personal side to this equation. Increasing your company’s profit margin is the key to increasing your take-home pay.
We can talk all we want to about meeting business goals and growing your company, but at the end of the day, it’s all just a means to an end. You probably love your company – it might even be a passion of yours – but it’s merely the vehicle you’re using to satisfy your own personal goals at home. You do it to earn money, which can then be leveraged to maintain a lifestyle, grow your savings, build a retirement nest egg, and buy freedom.
It’s not enough to increase your company’s revenue. If you’re only focused on increasing revenue, then there’s a pretty good chance that you’ll also increase your expenses in lockstep. This gives you the illusion of growth, but it doesn’t do anything for you and your own personal financial goals. The only way to increase your take-home pay is by increasing your profit margin.
5 Tips for Beefing Up Your Profit Margin
Increasing your profit margin isn’t always easy. However, the formula for doing it is pretty straightforward. If you put your head down and get focused, you can make it happen. Here are several suggestions:
1. You Have to Spend Money to Make Money
They say scared money doesn’t make money. In other words, you have to be willing to spend money and invest in the right resources and projects if you want to generate revenue.
When your focus is on taking home more, spending more can seem counterintuitive. And, truth be told, it can be…for a period of time. Your profit margin might actually take a hit for several weeks or months, but it’s the long-term results that matter.
Investing in the right supplies, materials, innovation, technology, and people can help you generate beefier profit margins. Don’t be afraid to spend when necessary!
2. A Dollar Saved is a Dollar Earned
While we certainly advocate for spending money in the right places, don’t forget that a dollar saved is worth just as much as a dollar earned. In fact, some would say it’s actually worth more. That’s because every dollar you earn has a price tag attached (including the cost of goods sold and other indirect expenses). This makes each dollar of profit worth slightly less than each dollar your business never spends.
We all naturally gravitate toward bringing in more revenue, but we also need to think about how we can spend less on the fluffy expenses that don’t truly move the needle. Intentional spending will take you a long way!
3. Reengineer Workflows and Systems
Peel back the curtain and look behind the scenes. Which processes, systems, and workflows are most integral to your company’s productivity and output? Now think about how you can retool them to be more efficient. This may involve eliminating steps, reordering processes, redesigning tools and workspaces, and automating manual, time-consuming tasks.
Sometimes the biggest savings are hidden in the most unlikely places. For example, did you know that many companies waste thousands of dollars per month on poor fleet maintenance strategies? Something as simple as automating with fleet maintenance software can help you achieve lower operating costs.
4. Move Employees to Remote Positions
New data shows that companies save roughly $11,000 per employee per year when going from full-time in-person working to 50 percent remote working. That means if you have a team of 15 people working in your office, adopting a hybrid strategy that’s 50 percent remote could save you as much as $165,000 per year (or $13,750 per month). Going 100 percent remote could save you double or triple that figure.
If the recent pandemic has shown us anything as business owners, it’s that our people and processes are more resilient than we ever realized. Going fully remote might have seemed impossible three years ago. But today? It seems rather plausible. It must be done strategically (and gradually), but the cost savings certainly justify the transition for many companies.
5. Focus on Customer Loyalty
Did you know that it’s between 5x and 25x cheaper to retain an existing customer than it is to acquire a new one? In other words, if it takes you $5,000 to bring in a new customer, it would probably take you somewhere between $200 to $1,000 to keep a current one. That’s why a simple five percent increase in customer retention typically increases profits by 25 to 95 percent.
There’s certainly an element of excitement and thrill in adding new customers – and proactive sales outreach is a must – but don’t forget about your existing customers. Keeping more of them engaged is the key to your growth.
Adding it All Up
Business owners often shy away from talking about themselves and their income. However, isn’t this why we do what we do?
Running a business is tough and (at times) thankless work that keeps us up late at night. It’s often characterized by emotions like stress, worry, fear, concern, and anxiety. If we want to enjoy longevity in our businesses, we have to get real about bolstering profit margins and increasing take-home pay. It’s not selfish – it’s necessary to our survival.