IS YOUR BUSINESS MAKING PROFIT?
HOW TO CALCULATE?
WHY IT ISNT?
HOW TO FIX IT?
HOW TO CALCULATE:
PROFIT/INCOME: You know how small business owners are very diligent with keeping sales journal and records. I mean how your sales girl records every single sale made and sends you a report at COB telling you how much the business made for the day?
You see the report and you say wow I made 100k today, in reality that is just the income your business made not the profit.
Profit can only be gotten by subtracting income from cost.
CALCULATING COSTS: costs are divided into 2 types. Fixed and variable cost.
Fixed costs are those ones that do not change e.g rent, license fees, some sort of taxes etc. Variable cost on the other hand are those costs that increase based on the degree of activity in your business, meaning that the more wigs you produce assuming that is your line of business, the higher your variable cost is.
Fixed cost can be calculated at the beginning of the year, you can almost ascertain that if the cost of your rent is 10,000ngn monthly then in a year your projection should be 120,000ngn .Even if you factor any increment in rent it can be easily factored in.
Variable cost is however dependent on the level of activity as stated earlier. So if you need 5,000ngn to produce 1wig, then you would need 50,000ngn to produce 10wigs etc. This may include raw materials, cost of direct labour etc.
Please note that payment of employee (indirect labour) is a fixed cost as it most times is constant and doesn’t change except you decide to.
Indirect labour eg cost of manufacturing is variable as it changes depending on your production level.
BREAK EVEN ANALYSIS: When you start a business, how do you know when you have broken even? Break even analysis is the point when your income is equal to your fixed and variable cost for a particular level of production, this doesn’t matter if your business is physical or online.
Let’s assume your rent is 20,000ngn monthly and you manufacture 1 wig at 5,000ngn and sell them at 10,000ngn each.
What this means is your break-even point is when you are able to sell 4units of wigs which sums up to the total of your fixed and variable cost.
BOTTOM LINE :Any amount made after your bottom line is your profit, it is important to note that you must aim to sell your products and services higher than it cost to produce them directly or in directly whether you sell wigs or hours of consulting.
WHY YOUR BUSINESS ISNT MAKING PROFIT:
- Low prices
Setting prices is one of the first and most important decisions you’ll have to make for your business. How you set your prices could easily dictate your future success. Most entrepreneurs immediately caution themselves not to set prices too high; if your product costs more than your competitors’, you could turn away your entire target market.
However, if you set prices too low, you’ll end up spending more in production than you can feasibly make back. Consider your margins carefully, and don’t be afraid to charge for quality. If you spend more time making your product better, people will be willing to pay for it.
- Too much overhead
There are some things your business absolutely needs to survive. However, you may be overestimating your needs in some key areas. For example, do you really need that 3,000-square-foot office when you have only two employees you’re running the business with? Do you really need to invest in that piece of machinery that adds only a marginal value to your finished product?
Think carefully about your overhead; if you spend too much there, you could create a hole too deep to dig out of.
- Too many ongoing costs
It doesn’t take much for your business expenses to start spiraling out of control; and because expenses come in so many forms, it’s hard to pin down any one area where you’re bleeding money. Think about how many people you have on staff, what you pay your vendors, how much it costs to produce a single product and even monthly variables like utility costs.
For all these potential expenses, cheaper options likely exist, along with opportunities to make cuts. So, don’t overlook them.
- Unseen or hidden costs
You may have a solid expense plan worked out, but there are some expenses you probably haven’t prepared for — and they generally aren’t lumped into your “regular” expenses. For example, if your business runs into emergency repair needs, that event could instantly demand all the revenue you’ve made for the month.
If you aren’t adequately preparing for taxes or insurance costs, meanwhile, those could end up burning you, too. All it takes is a few unplanned expenses to wreck your profitability model.
- Fierce competition
It’s possible that your expenses and prices are just fine, but you’re facing competition too tough to keep up with. For example, if your competitors have products similarly priced to yours but objectively better, you won’t sell enough to say alive.
So, find a way to differentiate yourself from the competition, and one-up them in at least one key area, whether that be price, quality or experience.
- A lack of market awareness
You may also be suffering from a lack of market awareness; if your product is at an ideal price for both you and your customers, you still might not generate a profit if no one knows it exists. Your greatest tools to overcome this obstacle are marketing and advertising; they cost a bit up-front, but are well worth the investment if you plan them properly.
There’s a chance that you have a perfect way to make your business profitable — but you’re executing too inconsistently for your business to reap the rewards. For example, your expenses may swing enormously from month to month, or your sales team might perform unpredictably based on individual variables.
Iron out these inconsistencies as soon as you can track them down. It may be tough to pinpoint exactly where your strategy is deviating, but it’s an important step if you want your profit to remain reliable.
These are some, but not all of the problems that could be stopping your business from generating a sustainable profit. You may be facing the problem from multiple angles, or you could be dealing with something else entirely, such as targeting the wrong market or failing to grow quickly enough.
HOW TO FIX IT
1. YOU NEED TO GROW YOURSELF SO YOU CAN GROW YOUR BUSINESS
Your business is a reflection of the decisions you make and your decisions are based on what you know. So, for your business to grow, you need to grow. After all, you can’t give your business the benefit of knowledge, which you don’t have.
Read the books. Attend the seminars. Seek expert advice. Grow. Then watch your business grow too.
2)CHANGE YOUR MARKETING TECHNIQUES
No matter how great your business is, unless you market it correctly, no one will know. Sadly, it’s a fact that an average business that’s marketed correctly, will outperform a wonderful business that has ineffective marketing. This is why some lousy businesses make a fortune, whilst some great little businesses really struggle.
By starving your business of professional marketing, by default, you’re relying on amateur marketing. This makes no sense. If you’re going to try DIY on your business, this is not the place to do it.
In a nutshell: If you want great marketing results, invest in great marketing
3)CHANGE YOUR IMAGE
Yes, if they knew how great you were, they’d hire you. But when they connect with you for the first time, all they have to form their decision on, is what they see. That’s why your image matters so much.
Here’s a question for you to ponder: How do you look, when a prospective client connects with your image?
Most small business owners operate behind naff logos, poorly designed websites and amateur looking social networking accounts. If you want prospective clients to consider you a professional, you need to look the part. No matter what promises you make, what testimonials you offer or what guarantees you provide, no one will take any notice, if your image looks bad.
4)CHANGE YOUR ASSOCIATION
There’s a direct link between how we feel and the people we habitually associate with. If we associate with people who inspire us, we feel inspired. If we associate with people who encourage us and motivate us to stretch, we grow.
That’s why it pays to be selective regarding the people we associate with. For example, when we associate with people who are doing better than we are, the natural inclination is for us to rise to their level. Of course, the opposite is also true. When we associate with people who are doing as well as us, or less well, we find ourselves spinning our wheels.
As Jim Rohn used to say: “You are the average of the five people you spend the most time with”.
So, choose wisely. Associate with people who will inspire you to be better. People who will encourage you and motivate you to be the best you can be.
In business, it’s extremely important to build great connections with influential people. This is the exact opposite of what the typical small business owner does. They go for numbers instead and look in the worst possible places.
Think about it: We’ve all met business owners who struggle to find new clients, even though they’re members of a networking group and have hundreds, maybe thousands of Linkedin contacts.
That should be impossible — right? Surely, with so many contacts, these struggling business owners would be able to reach out with a message and quickly attract more client inquiries than they need. However, this never happens. Why? Because they are connected to business owners who lack the influence and contacts, to be able to make a difference!
The most successful business owners use the exact opposite approach. I recommend you do the same. It looks like this: They deliberately target the most influential people in their marketplace and put a strategy together, to connect with them. They do this months before they ask anything from them.
And no, you will not find the most influential people in networking clubs, asking struggling business owners for introductions. You’ll have to do a little research. But that’s fine. You’re aiming for quality, not numbers.
6)ASK FOR REFERALS
Business owners who get too few referrals have to quickly figure out why their clients and associates are not referring them. This is a tough thing to face. It means accepting there’s a serious problem and then being willing to fix things.
Yes, it’s serious, extremely serious, if you get too few referrals. Not only are you missing out on a regular supply of valuable leads, your clients and associates, for whatever reason, do not want to recommend you.
A customer survey may help you find out why. However, honest conversations with those whose opinions you trust are often extremely useful too.
Just as importantly, when you get the feedback you need, make sure you do something with it. It’s hard sometimes to accept you have areas of your business, which you need to improve. I’ve seen business owners ignore really valuable feedback, believing they’re already offering an amazing service.