Profit Optimization is Ideal For Your Small Business
If you think you should be measuring the success of your business through your revenue numbers, think again. Profit is more important than revenue, but without revenue there is no profit. So, you can see how you would need to have both of those elements for success in your business.
However, profit optimization is what you need to focus on in your business. Businesses exist to create profit and maximizing that profit will increase the wealth in your business. If you own your business, then that ultimately means more money in your pocket.
What is profit optimization?
Profit optimization is finding ways to increase the profit that you make in your business.
Profit = revenue – expenses
The misconception is if you increase your revenue then you will increase your profit, but if you aren’t strategic and you are not managing your costs well or your pricing, then bringing extra revenue in the door will just be a band-aid solution.
Profit optimization helps you build a strong financial foundation in which to grow your business. It’s important to have a strong financial foundation before you grow your business to ensure that it is financially strong and can handle the growth. Growth can be financially risky for businesses who are not prepared for it.
Why you need to know your business numbers
Knowing your business numbers allows for you to maximize your profits. If you aren’t looking at your numbers, then you don’t know where the problems are.
Reading your financial reports and performing variance analysis on a monthly basis at a minimum will keep you informed in what is going on in your business and how you can change things to increase profit.
How to maximize profit in your business
1. Control costs
This is usually the first place businesses will look at to increase the profit in their business. It is the easiest way to increase profit – trim the expenses. When you have trimmed to the extent that you cannot possibly cut costs further without damaging customer service or product experience, then you need to look for other ways to increase your profits.
2. Increase revenues
You can use a revenue optimizing strategy to increase your revenues because when you reach a breakeven point for sales, typically any sale sold over that point is profit. Increasing the volume of sales will help you increase the profit line in your business.
3. Increase prices
You need to examine your pricing strategy on a regular basis. Take into consideration what your competitors are pricing at, determine where you want to be, and understand that ultimately it is the consumer who will decide if they are willing to pay more for your product or service.
4. Combination of all
Quite often businesses will look at all three of these options and come up with a combined solution.
How forecasting plays a role in profit optimization
I am a firm believer that when you create a financial forecast that plans your business activity 12 months in advance that will help you create profit optimization in your business. Forecasting, also known as a financial plan for your business, will help you in your business and manage your business in a multitude of ways.
- Create profit optimization
When you lay out your business numbers it is much easier to understand how your business creates profit and which offers are the most profitable. When you understand what is most profitable you can sell more of that, which helps increase your bottom line. Creating that financial forecast will help you follow the profit optimization tips listed above.
- Offer direction for your business
I often say, “A goal without a plan is just a wish.” It goes the same in business. If you are running your business without a plan, you will be lost on the hamster wheel. A plan gives you concrete goals and direction for your business. The financial plan breaks down your goals each month into manageable steps to reduce overwhelm and offer you clear direction.
- Allow you to monitor your progress
The great thing about having a financial plan when it is broken down month-by-month is that it allows you to monitor your progress each month. This means that you are looking at your business numbers at the end of each month and comparing what you actually did in your business to what you had planned to do. This way you can investigate what fell short and what did well. The purpose of monitoring your monthly results is that it allows you to course correct earlier on and ultimately save money.
The bottom line is when you know your business numbers and get comfortable with them, you can start to create the most profitable business possible. This should be important to you and your business because the profit is how you build your wealth. Having profit allows you to invest back into your business for growth, it allows you build your cash reserves, and it builds your financial security.
For business owners who want to create wealth from your business, profit optimization in your business will help you do just that. Do you want to learn how to create a financial plan for your business and start optimizing your profit? You are invited to register for the free Path to Profitability masterclass to learn how to increase the profit in your business.
I have helped many business owners go from scraping by in their business to building multiple 6-and-7-figures in PROFIT!
