Small Business Advice
10 Secrets of Profitability
Civilization and profits go hand in hand.
— Calvin Coolidge
My job is to assist entrepreneurs in all walks of business, from restaurants to waste management. Over the last 12 years, I have directly assisted over 3,000 entrepreneurs. Why am I telling you about me? I promise that it is not about my ego. Rather, I am just trying to get the point across that, as I have seen first-hand, no matter what the business, success rests on profitability.
I have seen too many businesses focus on building up sales and, in the meantime, lose track of profits. Sure, you need sales to produce profits, but sales alone can not bring them in. In fact, you can very easily have sales without profits.
The most successful entrepreneurs know how each of their decisions is going to affect the bottom line. Intuitively, they know that if they do not focus on profits, they will lose them. As I once had printed on some t-shirts, “Happiness is a positive cash-flow.” Without profits, a business is no fun.
Okay, so clearly, profits are important. Now, how do you increase yours? There are 10 secrets to increasing your business’ profits. I will cover each individually, but instead of thinking of them as independent of each other, consider them parts of a whole. The application of all 10 is what will lead to higher profits.
If you want to improve profits by $10,000 (with a 5% net profit margin), you really have two options: improve sales by $200,000, or reduce costs by $10,000. Which is easier? Of course, reducing expenses is the way to go. Any amount you save as a result of these reductions goes straight to the bottom line. Therefore, the first secret to improving your profits is scrutinizing each and every expense to determine if any can be reduced.
There are so many ways to reduce expenses. When I assist a business, I am usually able to easily cut expenses by 10 to 15%. When evaluating each expense, ask yourself, “Am I paying too much for this?” and “Do I even need this expense anymore?” Some of the glaring examples of expenses that can be easily reduced are cell phones, insurance, office supplies and unproductive advertising.
Having great staff makes managing a company fun and worthwhile; therefore, the second secret to having great profits is hiring the right staff. There are three criteria that you need to consider when hiring staff: motivation, people skills and character. Notice that I have not mentioned anything about technical skills or training. You can give staff training and teach them technical skills. You can not, however, teach motivation, people skills and character. Instead, you must hire candidates that already possess these attributes.
The third secret of profitability is consistently providing outstanding customer service. The best practices of corporations say that 90% of any business’ sales should come from existing customers. Outstanding customer service, which I define as consistently exceeding expectations, is how you get these return customers.
As I like to say, advertising is a means of attracting new customers, whereas customer service is a means of advertising to existing customers. When you think of it this way, it is easy to see how important great customer service really is. For instance, telling a customer that you will be out in two hours to empty their dumpster and then failing to show destroys trust. Compounding the damage, news about bad service spreads as the customer inevitably tells 20 other folks. News about great service will travel too, so it is important to concentrate on giving customers something good to say.
The fourth secret of profitability is incentivizing as many workers as possible. Worker incentives allow employees to make money when the business makes money. The more you can create congruence between individual workers and the goals of the business, the higher your profits. On countless occasions, I have seen entrepreneurs double their profits as a result of implementing worker incentives. Everyone is happy since, in the process, the employees make more money as well. Incentives work!
The fifth secret is taking great vacations. I have seen so many entrepreneurs get burned out after working way too long without any breaks. I once gave a seminar to 40 entrepreneurs who wanted to sell their businesses. When I asked them to tell me the last time they took a real vacation, most of them could not remember. Of course you have to work hard, but you also need to ensure that you have balance in your life.
I am convinced that the most successful entrepreneurs truly understand income statements and balance sheets; therefore, the sixth secret of profitability is making sure that you understand your financials. Sure, your accountant might be responsible for producing your monthly financials, but you must be able to interpret the numbers. Along similar lines, every business needs to have a budget. A budget is the roadmap for achieving your goals.
The seventh secret of profitability is finding a mentor. Empirical data has proven that mentoring leads to improved profitability. A mentor’s knowledge and skills add so much value, and all it takes to get one is having the courage to ask someone. Most people are honored to be a mentor.
The eighth secret of profitability is working smarter, not harder. Working long hours is not the solution to success. The solution to success is doing those things that have the highest value to your business. With each task, you need to ask yourself, “Should a CEO or a manager be doing this?” I have seen too many CEOs get caught up in routine tasks only to have the most important tasks fall by the wayside.
The ninth secret is focusing on time management. The most important thing you have is your time, and you need to make sure you use it as wisely as possible. Having a plan with goals and objectives to accomplish each day is critical. Focus only on those tasks that are both important and urgent. This helps you identify where you need to spend your time. Furthermore, the number one killer of time is interruptions. The more you can do to stop them, the better. It is okay not to be available all of the time. Allowing yourself to be unavailable gives you time to tackle the things that are important and urgent.
The final secret of profitability is watching every single advertising dollar. I find more money wasted in this area than in any other. You must ensure that your advertising expenses are outcome-driven. That is, you must be able to measure the effectiveness of every advertising dollar. If you can not, you will not know if you are spending your money wisely.
The average firm spends between 3 to 5% of its revenue on advertising. However, limiting your spending to this range is not enough. You must make sure that every cent is effectively spent.
To review, the 10 secrets of profitability are:
- Concentrating on reducing costs.
- Hiring the best staff you can.
- Focusing on customer service.
- Incentivizing as many workers as possible.
- Taking as much vacation time as you can.
- Understanding your financial statements.
- Finding a mentor to assist you.
- Working smarter, not harder.
- Using your time wisely.
- Making sure your advertising dollars are spent wisely.
I promise that if you follow these guidelines, your profits will greatly increase, and, more importantly, your life will be so much better.
You can do it!
Jerry Osteryoung is the Jim Moran Professor of Entrepreneurship in the College of Business at Florida State University. He is also the Director of the Entrepreneurship Program at FSU and Executive Director of the Jim Moran Institute of Global Entrepreneurship. He can be reached by e-mail at email@example.com or by phone at 850-644-3372.