Strategic Planning: How are Your Profit Margins? - dummies

Strategic Planning: How are Your Profit Margins?

By Erica Olsen

Even if you’re running a nonprofit or government agency, you’re always looking at improving your profit margins. Your margins tell you how much is left after you’ve paid your direct expenses. In the analogy of an SUV, your profit margins tell you how much gas is left in the tank when you arrive at your destination.

So what’s the secret to making more money? Stop doing things that lose money. Now, before you roll your eyes, don’t overlook the simplicity of this statement.

Here’s a classic example of losing money: A mid-sized, business-to-business software company realized that every dollar of revenue generated from its marketing campaigns cost the business about $1.20. Result: The marketing campaign is costing more than it’s worth ($1.00 – $1.20). Attributing marketing dollars directly to the sales generated can be a rude awakening.

Ready for some ideas on how to improve your margins? As you read through the lists of ideas, keep adding to your list of strengths and weaknesses.

As most organizations seek long-term sustainable operating models, cash creators aren’t focused on the bottom line; rather they’re about moving cash more quickly into and through the organization. Think about how the Great Recession helped people get lean and put some of these practices in place to stay that way.

Here are some ways to identify quick cash creators that yield lasting results in a short time:

  • Do an expense shakedown. Take time at least once a year to scrutinize each and every company expense. Remember that old habits die hard. Evaluate your travel expenses, telecommunication expenses, insurance costs, subscriptions, and so on. If the expense doesn’t contribute to your company’s profitability, eliminate it. You’re just about guaranteed to find areas in which costs can be reduced or cut out entirely.

  • Clip coupons. Okay, not exactly coupons, but find good deals on business services. Everyone from Costco to Microsoft is catering to the small- to mid-sized business market. Make those companies win your business by comparison shopping. This idea is great when you’re talking telephone or cellphone plans, suppliers, or even interest rates on company credit cards.

  • Increase your prices. Not everyone can increase prices. But if you can back up your price increase with better products, service, and quality, you’re likely to keep all your customers. Most people are accustomed to the idea of getting what they pay for.

    Some advise you to increase your prices 10 percent per month until you lose 10 percent of your business. Then stop. You may try it again when you improve your products and services. The concept is interesting, and it may have some value for your business.

  • Be clear about your payment terms. From the get-go, institute a consistent and firm payment process. Most customers appreciate your professional approach if the way you do business is clear.

    You may consider letting your clients make payments over time, but the costs of having customers who pay late is significant, not only on the cash side but also on time spent on collections.

  • Ask for more business. Do your current and past clients know about all the services you offer? Not only should you educate your customers annually about what you offer, but you should also ask for more business. Chances are you’ll get it.