Ten Keys to Building Profit
Creating profit in a small business is more difficult than ever. Most small business owners believe that sales growth leads to profit, but it’s more complicated than that. Even in times of declining sales it’s very possible to improve profitability, but it cannot happen unless you know what parts of your business need to be monitored.
Here are ten key areas to help you improve your profit:
Have correct pricing
Pricing is very important to profit. If you don’t charge enough, you will fail no matter how much you sell. Most small business owners set pricing according to competition or industry standards. Although those factors help shape pricing, the most important part of pricing is making sure that it is high enough to cover your expenses. If you don’t price your product high enough to cover expenses, you cannot run a profitable business. This sounds very simple, but it’s very often ignored.
From correct pricing to growing average ticket to monitoring marketing and sales, these steps can improve your bottom line even in challenging time.
Know your real gross margin
Gross margin is the amount you have left over after paying for your materials. That amount has to be greater than all the other expenses you have or you won’t be profitable. If you use the gross margin your accountant calculates on your tax return, you will have a different number each year. Actually gross margin should never change unless you change your pricing mark-up or your discount strategy. To know your real gross margin, you must know how much you are marking up your materials and how much discounting you do. Understanding this gives you a “fixed” gross margin you can use to accurately determine your real profit. This is the best way to set your prices- mark things up enough so that after all discounting you have enough left over to pay all your expenses.
Limit your discounting
The temptation today is to reduce prices so that you get more sales. As we learned in the section above, every time you increase your discounting, you decrease your gross margin. Discounting erodes profit faster than business owners realize. When you discount, you must offset the impact it has to your profit by doing much more volume. In many cases you are more profitable when you take in less work at full mark-up than when you increase sales at a lower gross margin. In any case, it is very important to track the discount dollars you use to attract more business and compare that to the amount of increased business the sale produced. Once you start doing this you will understand why cutting prices can be a very unprofitable strategy.
Grow your average ticket
This is the best way to increase your profit. If you sell your product for a higher price, you can make more money without even doing more business. This means no additional labor even though you are taking in more revenue. The single most common statistic in our industry found in profitable framing operations is a high average ticket. Building average ticket places a focus on the real reasons why custom frame shops exist- design and creativity. It certainly isn’t because of price. Our products were never sold to clients seeking a low price. No, they came to us because we could do one thing better than anyone else- design a product that would protect and enhance the things they cherish. In times like this that is easy to forget. The framers who understand their true value to their clients know that great design is why they are in business. Great design and preservation materials build average tickets. High average tickets build profit.
Limit your vendors
I’m often amazed at how many vendors custom framers represent. The biggest reason they give is that it provides a selection they need. What they fail to understand is the cost they pay for many small orders from many different vendors. That cost continues to rise as fuel prices go up. The price you pay for multiple shipments takes its toll on productivity and labor costs too. Creating and placing small orders, checking them in and prepping them for production ads up to huge costs. Limit yourself to a maximum of four vendors to increase your profitability.
Know your salary cost
There really aren’t a lot of expenses you can control throughout the year. Most of them are fixed. The amount you spend on labor is something you can control. Today, many framers pay too high a cost for labor. Even though business has gone down, we fail to reduce labor to a cost that is consistent with our lower level of sales. Many today have a labor cost which is above 20% of sales. This level of cost makes it hard to be profitable. Cutting help is very difficult. It makes the downturn in sales a reality to your team members. Keeping this cost in line is your job however and very necessary to staying in business. Remember, if you don’t control expenses, you won’t be able to provide employment for anyone.
Pay the right rent
If you think we have problems making a profit in these times, you can bet it’s even more difficult on your landlord. Retaining tenants is much more important than getting full rent values. If you are struggling, go to your landlord now. Don’t wait for your lease to expire- re-negotiate now. How do you know if you are paying too much? If your cost of rent is more than 25% of your sales you should be trying to reduce it. Remember to ask for something fair- working together with your landlord is the key.
Monitor your marketing
You can’t afford marketing that doesn’t create a return in this economy. The term “institutional advertising” doesn’t work towards making you profitable. If you can’t see the return you are getting on a marketing investment, don’t invest in it any longer. POS systems allow you to easily track how new customers find you. They also let you track the income for promotions. Doing this is a must. Paying for marketing which doesn’t grow profit is too costly.
Create a line of credit
No matter how well you run your business, there will be times when cash flow doesn’t meet the expenses you have for the short term. Many small businesses choose to delay payments or run up charge card expenses to get through these times. Instead of risking your credit with vendors or adding expensive credit card debt, establish a line of credit with your bank. This low interest account is made available to you before you actually need it. As cash flow improves, you can pay back the loan and replenish the account for the next time you need it.
Post and track key statistics
You can’t improve without accountability. One of the most important ways to shape the profitability of your business is to post your goals and results where the entire team can see them. If you want to improve average ticket, you must set team goals and post results. Without this type of commitment to performance your goals will become buried by all the other priorities of business and they will never become reality. Open tracking of the few key goals you have and tying compensation to performance is the fastest way to make the changes that build a more profitable company.