Profitability is one of the key performance measures in your small business. Profitability refers to the amount you, the business owner, retain after you’ve deducted your expenses. While cash flow- the amount of money flowing through a business is important, ultimately, profitability is the best measure for long term viability of the company as well as long term satisfaction of the owner(s).
Profitability is impacted by two main factors: prices charged and costs incurred. When a company can provide services or goods for less than they charge, they are profitable. When it costs more (in time, money, resources) to provide the service or good than they have charged, they are losing money- i.e. are not profitable.
This seems to easy to measure in fixed goods, but more difficult to measure when we trade assets like our expertise, intelligence, creativity, and brilliance. When we are employed within the knowledge economy, how can we measure our own personal ratio of costs/expenses to profits/income?
One way to do it, of course, is through the concept of hourly rate. How much do we charge per hour, and do we feel that is a fair return on our investment of time, energy, brainpower?
Yet, for many of us creative entrepreneurs, the work we most love to do is exactly that which we’d do for free- because we love it so much. So how do you keep an eye on profit when you are also doing work you love?
There are three ways to increase profitability of any business:
1) Increase prices.
2) Sell more of your services or goods.
3) Reduce your expenses.
Increasing your prices can be accomplished by raising the dollar value of your time, reducing the time you spend in each task, or increasing the dollar value of each sale. You, might, for instance, move your rate from $300 to $400 per hour. Or you might move to 45 minute sessions instead of 60, keeping the price the same. Or you might sell your hours in a bundle or package such that you collect more money per sale. These are all ways to increase your profitability.
Selling more services or goods can be accomplished by finding more good clients or customers at low cost, or or by selling more to your existing clients, so that you don’t have the costs associated with marketing or client acquisition. It costs about 60% less to retain a client than it costs to acquire a new one, so it make sense to retain your clients for as long as you both provide value to each other. How can you sell more of your goods and services to your existing clients and keep providing value longer?
Reducing your expenses. Since profitability results from the ratio of income and expenses, it makes sense that reducing your expenses will boost your profitability. While I want you to have the resources you need to do your work well, most of the time we need fewer resources than we think to do our work. Case in point: when people spend thousands of dollars on branding their business BEFORE they’ve ever gotten their first client. You shouldn’t brand anything unless you’ve sold it at least a few times and have satisfied clients. Similarly, you don’t need a lot of infrastructure to attract your first few clients. Focus on profitability from the beginning by keeping your expenses low.
As a business owner focused on profitability, your goals should be to attract good clients, retain them for as long as there is value to both parties in doing so, and keep your expenses as low as you can while still providing high quality service and a distinctive experience.
When you keep the focus on profitability, you can be sure that your business will make dollars and sense.