This post is part of a series called “Starting a Small Business,” where we look at the steps to start a business and make it big.
Now your doors are open and you are running a small business. Congratulations! It is now time to focus on making your business profitable. The obvious way to increase profits is to increase your revenue and cut your costs. These are separate but related tasks, and some costs are dependent on revenue and some revenue relies on some expenses.
Dealing with Fixed Costs
There are certain expenses that are unavoidable in business. Those include rent, insurance, and some utilities. Costs that are the same if you make zeros sales or if you make a million sales are called fixed costs. It is often difficult to find ways to cut fixed costs, but making a small change can have a big result in the long run as the savings will occur again and again indefinitely.
Start by identifying your fixed costs. If you have a brick and mortar store, rent is probably your biggest fixed cost. Do you need all of the space you have? Can you negotiate lower rent? Can you share the space with another business or sub-lease out some of the space? These could all lower your rent cost, and many of them take little effort.
You might also find that some fixed costs are avoidable. You might have a payroll service that you pay each month to deal with HR issues. There are computer programs that can handle all of that for you after paying one time. If you rent or lease equipment for your business, you might be able to save in the long run by purchasing it. Each company is unique, so you have to really dig in and see where you can cut.
Saving on Variable Costs
Variable costs are expenses that increase with sales. If you sell a product, the costs to produce each product are considered a variable cost. If you manufacture something, the additional utility costs and labor required to produce additional units are variable costs. It is harder to cut variable costs, but it can be done.
If you sell a product, look at each raw material or your product sources and find if there are ways to negotiate a lower price. Walmart, for example, pushes each supplier to the bare minimum price so it can pass on lower prices to its customers and maintain high profits. If your products are labor intensive, look for ways to improve efficiency. If you have 10 employees making 10 of your products per day, try to find a way for 9 employees to make 11 or 12 per day. That saves you the expense of an entire employee.
As Milton Friedman famously said, the business of business is to make money. To make money you have to make sales and bring the money in the door. There is no big secret to increasing revenue. Again, it changes from business to business. However, there are a couple of methods that transcend nearly all industries and companies:
Marketing – Buy advertising space, hire a kid to stand on a corner with your sign, give out samples to potential customers, make cold calls, visit trade shows, and do whatever you need to do to get your name out there for potential customers.
Networking – Meet people in your industry and related industries. Build partnerships that may be mutually beneficial with other companies. Meet people that could give you a referral. Join your local chamber of commerce. There are countless ways to meet people and build up a network that can lead to business success.
Entrepreneurs, It is Your Turn
Many people, including some readers, have been doing this for a long time. Please chime in below in the comments to give your tips and tricks to build revenue and cut costs.
Please read all of the posts in the series:
Get the FREE Personal Profitability Playbook
Earn more, spend thoughtfully, grow your wealth, and live a better life through mindful personal finance.