How to Improve Cash Flow by Reassessing Profit Margins

Cash flow is an issue that can plague small businesses. It may be due to late-paying customers, cash tied up in inventory, or reinvesting profits back into your business. It can also be due to your profit margins being too low. And it’s this last reason we’re exploring here with advice on how to reassess your profit margins.

#1. Calculate your breakeven point

A breakeven analysis can help you determine the point at which your business begins to make a profit. This important exercise weighs your total business costs and overheads (fixed and variable) against your revenue to determine your breakeven point: the point where your revenue covers your outlays. And as your revenue starts to exceed your outlays you enter a cash flow positive situation, what is called net profit.

So, if your profit margins are high (good), go on to point 02. If your profits are low (bad), make your way to point 03.

#2. If your profit margins are high

If your profit margins prove to be good, but your cash flow is still stunted, then it’s time to evaluate how to improve your bottom line (a.k.a. your net income). This can be done through driving growth, diversifying products, entering new markets and creating new initiatives, such as marketing campaigns. However this too can take a toll on your costs and further affect cash flow so go forth carefully and wisely.

#3. If your profit margins are low

If your margins prove to be low, you need to find out why. It might be due to high costs or because you’re reinvesting profits back into the business, but no matter the reason decreasing expenses, streamlining operations and simply becoming a “leaner” business can help improve profit margins. The core idea of a lean business is to maximise customer value and minimise waste; or in other words, create value for customers with fewer resources. You may also consider reassessing supplier relationships, negotiating contracts and postponing big-ticket purchases.

#4. Don’t be afraid to increase your prices

Underpricing your services (whether you know you’re doing it or not) is a common problem for small businesses. Determining the right price to charge can be a difficult decision as small business owners weigh up opportunity and competition, underestimate their own business costs, undervalue or become afraid to raise their prices or rates. But if a customer values your product or service a price increase (or correction) should not dissuade them.

To reduce the likelihood of losing their support, ensure you have a robust value proposition (or perceived value) and a solid reputation to support your price point. Consider testing different prices in certain markets, industries or geographies to determine if and how demand is affected and to help you find the right price point.

#5. Check out the competition

Your business is not an island; you are in a marketplace with other businesses offering similar products and/or services (a.k.a. your competitors). If you want to raise your prices or alter your customer value, evaluate how your business, brand, product or service is distinct from your competitors: where it is now and where it could be. There might be a market to differentiate your business enough that it could be positioned at a different point in the market, which can then impact your customers, prices and market penetration.

#6. Employ people (women!) who know how to improve business performance 

Not everyone is attuned and skilled at improving a business’ performance, which can thereby increase profit margins. But you know who are? Women. Multiple studies (at least here, here and here) have found there is a positive correlation between the presence of women in leadership positions and a firm’s improved performance. As one study reports: “…a profitable company in which 30 per cent of the top executives are women would expect to be about 15 per cent more profitable than one in which the C suite is all male. Unprofitable companies gain even more.”

For any further information about how to reassess your profit margins and improve your cash flow, talk to the team at Parallel / Desk Space. You can also ask us for any other advice or recommendations.

Categories: General News

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