Let’s agree on one thing, to begin with: profit is the number one most important number in a small business!
That comes as a conclusion after years of experience working with founders and leaders. And for your company’s growth, I hope you think the same!
This two-part blog post will delve deeper into profitability. I will share with you a few strategies you can act on to increase profitability for your business!
Why is profit the most important number in your business?
Please don’t take my words for granted. Let me explain why profitability is crucial for your company.
I can tell you that many leaders plan growth in terms of revenue. But, wouldn’t it be better to make $1,000,000 with a 45% NET profit margin vs. $2,000,000 with a 5% NET profit margin?
Others consider expansion in terms of team size. They have goals for team expansion that are unrelated to profit. In other words, they believe that having a large team around is a sign of success, even if there are no funds to pay them.
What’s important to remember is that profit fuels growth in small businesses. Profit reinvested in the company supports progress across all business areas. From product development, to team expansion, marketing, and streamlining operations, to name a few.
How can you tell if you’re not putting enough focus on profitability? See if you recognize yourself and your team in some of the below statements:
- You do not look regularly at P&L reports.
- You end up surprised at the end of the month, or even worse, at the end of the year. You made no profit.
- You have no coherent client acquisition strategy in place. This is because you do not know what types of projects and / or clients are most profitable.
- You make hiring decisions out of fear. You are afraid of being overwhelmed. You are afraid you will not have money to pay your teams.
- You do not factor in the cost of not working with replicable structures. You do not see how processes and templates can decrease your costs and ultimately increase your profit.
- You assess a tool based on its features and cost. You do not think in terms of expensive time it takes a person to do the same job.
Don’t feel bad if you checked the majority of the boxes. There’s a way for you to refocus your efforts on profitability and increase your revenue. I am here to walk you through the steps.
I put together 5 actionable strategies to help you change how you think and act about profitability. Start using them today, and I guarantee you’ll see an increase in profitability within 1-3 months.
Strategy 1 – Review your P&L report regularly
It all starts with the basic task of understanding your Profit and Loss report. I like starting simple and laying a strong foundation before anything else.
It’s ok if you don’t know how to read a profit and loss statement. What I recommend you do as soon as possible is to discuss this with your accountant. Believe me! Understanding this single report will significantly impact how you run your business.
Here’s what you should do once you understand the numbers in your P&L:
Do a thorough monthly review of your P&L and look at each line item inside.
Why?
- You will immediately understand why the profit is low.
- P&L offers an overview of your income versus expenses for the period.
- You will see the total expenses per category. Next:
- Analyze further those categories where you see the highest expenses.
- You will probably be surprised to find out you are paying for products and services you are not using.
- Maybe your expenses are actually very low, and there is no way to cut them. This means one thing: your revenue does not cover overhead.
Do a weekly brief review. Look at totals: income, expenses, and net profit
Why?
- To stay in touch with how your numbers evolve during the month.
- To make it a habit to have P&L numbers top of mind.
This is one of the simplest but most overlooked strategies for increasing profits as a business owner. We sometimes underestimate these simple things because we think more complicated is better.
In my experience, the habit of working with your P&L report on a monthly and weekly basis, will bring a great deal of clarity on your business’ finances.
Strategy 2 – Calculate profitability per client and project
We all agree on one thing now: P&L must be reviewed regardless of the size, industry, or specifics of your business. Only then revenue and profit will be predictable.
If I was to put in place just one more strategy, it would definitely be tracking profitability per client and project.
Obviously, a business owner’s primary goals are to expand the company, increase revenue, and, ultimately, profit. What do you need more of to achieve these goals? Clients and projects, without a doubt!
The first question you should ask yourself is: How do you know what clients and projects to go after?
The two obvious options are:
- You go for the clients that are the easiest to close.
- You go for the projects that you most like delivering.
Before deciding between these two options, take a moment to consider whether these clients or projects are also the most profitable.
Have you ever considered that closing more unprofitable business can lead to worse financial results than not closing any additional business?
That’s correct! Unprofitable projects can eat into your overall business profit and reduce your net profit margin.
So, if you needed another reason to track profitability by client and project, this is it!
There are a few steps you can follow to have an accurate picture of your profit for each client and project.
Tracking talent expenses
Most service-based remote small businesses associate their highest costs with project delivery. It’s a fact! This means that talent represents their most considerable expense.
Here’s what needs to happen to spend these resources for generating profit:
- You want to be able to associate talent expenses with the right project.
- You can track each team member’s work on a specific project by using a simple spreadsheet or a time tracker. There are many available tools, and they all offer the basic features to get the job done.
Tracking project delivery expenses
Project delivery is another category of expenses that needs a closer look. There could be different direct costs you can associate with your projects. Tools or services you pay for or any external consultants or partners you work with, for example.
What’s important here:
- See if your time tracker offers the option to add expenses to projects, and if so, make a habit of using this feature.
- If not, start a spreadsheet with all projects and associated expenses. This sets the ground for the next steps as well.
Tracking overhead expenses
Overhead expenses are often overlooked when calculating profitability per project or client.
Overhead is the sum of all expenses that are not directly related to a specific project. Examples include accounting services, insurance, company-wide tools, sales, marketing, and others.
When it comes to overhead, you have two options:
- Divide it equally among projects or
- Divide it proportionally based on project revenue
Here’s my take on this:
- I believe the proportional way of splitting makes more sense. In most cases, a bigger project will “eat up” more overhead than a smaller one.
- Yet, if your business is different and you know the overhead is exactly the same for big and small projects, you can just split it equally.
You need a spreadsheet to calculate the overhead expenses. Having all expenses in one place makes your life easier. Include overhead calculation in the same spreadsheet as the previous project specific expenses.
Once you’ve added up all these costs, you’ll have a complete picture of the expenses for each project. You can now look at project profitability and draw some conclusions based on what you see.
You can also go a step further and generate profitability reports for each client, depending on the specifics of your business. Examine all projects with the same client to determine the overall ROI on your work together.
However, if you provide various services and digital products, you can calculate your return on investment by service. I have shared here the results I obtained for one of my clients, by implementing this strategy.
Action the Strategies Today
Start tracking these numbers! Set yourself up to make informed, data-driven decisions when it comes to going after profitable projects and clients.
As a small business owner myself I put Strategy 1 and 2 in place and I know exactly what projects I need more of to grow my business.
The sooner you master these strategies, the sooner your business will grow.
Keep an eye out for the next three strategies. They will skyrocket your profitability when actioned.