Maximising Your Profit Potential

Catherine Erdly focuses the minds of small independents

With customer confidence wavering and overheads increasing, there’s never been a more important time for small businesses to get laser-focused on their bottom line.

Even for those businesses that have seen good top-line growth, keeping an eye on the bottom line is essential. Understanding how profitable your business can be while identifying the areas that may restrict profit potential is key.

In an ideal world, small businesses should have a focus on their profit from day one. As hard as it is to manage the multiple roles that you have to juggle in your business, focusing on profit should be top of your list.

In-margin

When you are aiming to maximise your profit potential, you need to focus on key figures that will help you track and improve the underlying health of your business.

Your in-margin is the percentage of profit that you will hypothetically make when you make a sale. The margin you achieve is important as it’s the building block for your profitability. While the right in-margin will vary depending on your product type and selling model, anything lower than a 50% in-margin will make profitable growth difficult.

Out-margin

This is an oft-neglected part of tracking your profit potential. Why? Because it’s a little more challenging to pin down the numbers. Your in-margin represents how much you would theoretically make if the product sold at full price. Your out-margin takes into account any promotions or sales, and tracking this on a monthly basis is advisable.

If you’re consistently discounting, always running sales, clearance events, blanket discounts or have an overly generous welcome discount, those are all ways that you can erode your out-margin. If you track it on a regular basis you will be able to easily identify the problem areas.

Productive stock

How quickly do you get your money back after you’ve paid it out to buy stock? Is it immediate, giving you a healthy cash flow? Or can products sit on the shelf for long periods of time? Understanding which products impact your cash flow is a key element to knowing your business’s profit potential.

One of the ways to measure stock is knowing how many weeks’ worth you’ve got at any one time – if you were to sell at the current rate of your average weekly sales, how many weeks would your stock last for? Then identify your sweet spot – you don’t want to sell out of your most popular products and you don’t want slower stock eating up the cash in your business.

Understanding that not all stock is created equal is also important and when retailers dig into the data on their stock there is so much potential for making changes to improve profit potential.

Counting the cost

Once you’ve understood more about your margins and your stock, retailers need to know what running their business actually costs them, in other words, what are the fixed and regular costs?

Staffing, facilities, utilities, postage, fulfilment, packaging – the list is long but one all small business owners should know and track, then ultimately have a breakeven plan to know what level of sales they need to cover their fixed costs.

Knowledge is power and the more you know about your business the more you can ensure it’s resilient and profitable. Time spent reviewing and refining the profitably of your business is enormously valuable.

Hook up with Catherine at resilientretailclub.com, meet her on LinkedIn (catherineerdly) or on Twitter @ResRetailClub
Catherine’s article first appeared in Forbes.com