Stabilising and Boosting Your Profit Margin: 3 Tips for SMEs

Starting a small business is no easy feat to accomplish, but breaking even can be an even more challenging task. Once you break even, the next challenge is that of maintaining and eventually sustainably growing your profits. As we can see, after the business’s initial inception, the overall profit margin will continue to be a consistently critical factor throughout an SME’s stages of stabilisation and growth. Taking a few hints from successful entrepreneurs who started small, let’s discuss a few pro tips that can help small business owners maintain and even grow their profit margins.

Focus on Stabilising the Current Profit Margins First

Stabilising your business’s overall profit margin is more important than trying to actively boost it. If you attempt to increase your profits on multiple fronts without stabilising the present margin first, chances are that the business will soon see a drop in its overall profits rather than a boost.

It’s exactly what happens when a company starts to grow too fast, without considering whether it can sustain that growth. Just like business growth, business profits also need a stable base to ensure that the planned growth is sustainable in the long term.

To successfully stabilise a business’s current profit margin, the profit margins across all applicable fronts must be properly calculated and established first. For example, if you have a retail business, calculate your current profit margins on each of the different products that you are selling.

It is not uncommon for small businesses to find that they are actually losing money on some of their products, but that fact was hidden before by the much higher profits they were earning from some of their other products. A small retail business should not be losing money on any of its wares.

The goal here should be that of addressing the situation by either raising the selling price and/or lowering the buying price. If none of the options are feasible, it’s best to cut off a revenue stream that’s costing your business money. Stop stocking up on the product until you can find a way to make the sales profitable.

Buying More for Less

In the previous point, we discussed how it is better to shut down a revenue stream if the revenue earned from that stream is neither profitable nor can it be made profitable by any means. However, as previously mentioned, that’s an extreme case scenario. More often than not, there are ways to first stabilise and later boost profits from a previously weak revenue stream.

If the retailer could buy the same product at a lower price, then they might not even have to increase the selling price to earn a profit from the sales. In other words, the revenue may or may not stay the same from that particular revenue stream and yet, they will now earn a greater profit on each sale. This can be achieved by applying any one or preferably both of the following strategies:

1. Find a wholesaler with a cheaper rate.
2. Switch brands.

For example, if you have a retail shop for electrical products, you can increase your profit margin on each sale by switching over to a wholesaler of bulk electrical supplies who is willing to sell the required supplies at a cheaper rate than your current supplier. If they have a wide range of brands to choose from, you will probably be able to switch to a cheaper, but still reputable manufacturer for certain electrical products.

Spending Less for More Profit

Inefficiency is not always deliberate or even apparent to small business owners. For example, if your business has a physical presence, you need to ask yourself if you are paying more rent for space that the business currently has no use for. Perhaps the idea is to use that space once the business is ready to add an extra office or two and expand beyond its current size.

However, that only makes sense if you have already bought the property. Paying rent in the present for prospective growth in the future will only delay your business’s prospects of growth. Only pay rent for the space your business needs and you will be able to use the money saved to fuel your business’s growth much earlier. Don’t forget that once a business is ready to grow, you can always shift to a bigger space at that point.

If the business is not one that needs to have much of a physical space at all, then consider switching to an online business model. Any small business that has an opportunity to do so should consider switching their business operations to an online model.

It can potentially boost your profits beyond what you could have ever achieved while paying for the many expenses associated with maintaining a fully-fledged business space. If possible, consider making gradual a switch over to the O2O business model to boost profit margins considerably.