by Nathan Liao, founder of CMA Exam Academy
In order to thrive, businesses must have a healthy bottom line. Have you recently taken a long look at your product-based company’s financials and realized that its overall profit is much lower than you expected? Even though your business is making a ton of sales every month, the numbers don’t lie — profits may be much lower due to the money your company has to shell out each month for payroll, the costs incurred for manufacturing your products, and other overhead expenses. This can definitely be quite frustrating for any entrepreneur!
Now you may be thinking, how exactly can I increase profits without having to make massive changes in my enterprise’s operations? Is there a way to grow net profit without the need for more sales or marketing outreach? Well, wonder no more! In my experience as the CEO and founder of CMA Exam Academy (a Certified Management Accountant exam review program), I’ve discovered many simple-yet-effective ways a product-based business can increase its monthly profit.
Here are three of them that I’ve encouraged other entrepreneurs to follow:
1. Prepare & Review Your Budget Now to Save Later.
Your profit may be much lower than you thought it would be because you never set up a budget, or you set one up in the beginning of the year or quarter and then forgot about it. Don’t let this be the case any longer! Your monthly budget is your guidebook of exactly what your enterprise needs to function and deliver its offerings to customers. It is important to take the time to put together a spreadsheet that lists exactly which costs are needed for each month’s operations, including subscriptions for your CRM and sales management software, payroll, manufacturing essentials, etc. Include EVERY single cost, no matter how small it is! Better yet, use an accounting system to track all of it.
Once you prepare this budget, it’s time for the second step: comparing it to your business’s actuals. You may have written down the monthly overhead costs in your budget so they are set in stone, but your actual expenses could be much higher without you even knowing it! So take your last month’s financial statement and review the expense lines to identify the largest variances from your budget. For example, you may discover that the costs of office supplies or cloud-based file storage are higher than you budgeted for. Once you note these discrepancies, you can make changes to ensure the actual expenses match your budget.
2. Look for Waste in Production Processes.
You may be completely unaware of waste that occurs throughout your production process. For example, a process that you use to manufacture your products may result in a lot of wasted materials, which can be really costly and lower your overall profit. So see how you can lower or eliminate the waste altogether. Assess all of your production processes to pinpoint any waste and consider changes that can be made to fix it. Even a small adjustment in the process could drastically reduce the waste, so this is a must-do step for every product-based company!
Waste can also refer to costly, unnecessary manpower in an inefficient process. For example, say you have several people working on one element of the production process, when in actuality only one person really needs to work on it. In this case, the extra manpower is a wasted cost — it can even be lowering the overall efficiency of the entire process!
3. Try to Negotiate with Vendors.
Do you work with an array of vendors whose products are used to create your final offerings? For example, do you purchase bulk materials from several sellers to create your business’s products and then buy packaging supplies from another vendor? If so, see how you can negotiate with them to get the best prices for these items. Here are a few ways you can do this:
- See if You Can Hammer Out Discounts for Early Payments
Every business owner wants their invoices paid on time so that they always have the funds available for operational expenses. Therefore, see if your vendors would be open to offering you a discount for paying your monthly invoice early. Even if it’s a small discount percentage, it can really add up to a ton of savings! For example, say you usually buy $4K worth of materials each month from one seller. If you can negotiate a 5% discount for paying your invoice early, you will save $200 a month! And if you secure 5%-off early payment discounts with every vendor you buy from, all of the savings would really add up and increase your monthly net profits!
If a seller isn’t open to an early payment discount, see if any of their competitors would be open to one. If one of the competitors is, mention this to your current vendor and it may persuade them to offer you one as well. They would likely much rather agree to a small early payment discount than lose your business altogether to one of their competitors.
- Negotiate Pricing
Kind of going along with the last point, see if you can negotiate pricing with your vendors. Again, reach out to your vendors’ competitors to see what kinds of pricing options they offer and how they compare to those of your current vendors. If any of the competitors offer the same materials for better prices, see if your current vendors would be willing to offer the same prices. If they are not, then consider switching vendors — even if the pricing difference is just $50 a month, you will end up saving $600 a year! Always consider the long-term savings.
To Wrap It All Up
Are you looking for ways to increase your business’s net profit? You can do just that by preparing and reviewing your budget now to save in the next month(s). On top of this, assess your production processes to eliminate costly waste. Also see if you can negotiate with your vendors to secure discounts on early payments and lower the prices for your monthly purchases. Following these simple-yet-effective steps may help you save a lot of money and boost net profits, in turn improving your company’s overall bottom line.
Nathan Liao is the founder of CMA Exam Academy, a top Certified Management Accountant exam review program. As a CMA and CMA coach, Nathan mentors accounting and finance professionals in over 80 countries to earn their CMA certification in as little as 8 months. CMA Exam Academy’s unique review framework has proven to be the key to his students’ success in attaining their dream of earning the Certified Management Accountant certification.