Improving the Profitability of Small Businesses

Improving the Profitability of Small Businesses

Introduction

Small businesses include sole proprietorships, partnerships, and private-owned corporations with few employees and relatively low annual revenues. These businesses get formed to achieve growth and earn huge profits in the future. It is the nature of small businesses to lack resources, particularly finances, but they strive to find ways and operate successfully with high-profit turnover. However, a small business should use several ways in its operations as a means to improve its profitability.

Ways a small business can improve profitability.

A small business will face numerous challenges before they breakthrough and earn high-profit returns. However, a small business can benefit from several ways to turn their operations and activities into profits in the long run. The following are the common means of making your small venture successful;

The business owner should ensure and enhance better employee efficiency to earn high profits. Employees get termed or identified as crucial assets in every business that helps make activities proceed as needed and generate profits. According to Panagiotakopoulos (2020), to directly increase the financial outcome, there is a proactive need to recruit employees who possess skills and are experts in their areas of specialization. For example, highly skilled workers tend to have unique and best ways to handle business-related issues and customers, thus creating loyalty and increased sales in the future. With customers treated with dignity, they will tend to buy again from your shop and amazingly refer to others doubling the profits earned by a business.

Cost factors tend to affect profit margins, and a business would need to cut down on its operational cost to breakthrough. A business buying raw materials should ensure that acquisition costs are very low to maximize the profits earned (Kukanja & Planinc, 2020). The strategies to acquire such raw materials would involve sound decisions such as buying from cheaper suppliers and bargaining for less costly transportation services. Those businesses handling inventory can apply the economic order model to manage ordering, storage, and purchase costs. As such, low costs will leave a business with huge profits, which is a good performance.

Owners of small businesses can expand their businesses by investing more resources or partner with others to improve profitability. It is worth noting that little investment will earn little returns and no compromise on that principle. Therefore, an entrepreneur should take more risks such as plowing back profits, take some loans, get donations and grants, and borrow from friends to expand their operations. With the expansion of an investment, the once smaller firm stands an opportunity to improve and make huge profits in the future and successfully grow into a large investment.

Small businesses can benefit from innovation to deliver unique products and services to customers. With differentiation, proprietors can offer unique products in the market and attract customers compared to large-sized firms. As such, unique products and services attract a large customer base, a high volume of sales, and, consequently, increase small businesses (Heikkilä, Bouwman & Heikkilä, 2018). Some of the ways a small business can gain innovativeness are staying alert to get the right market information, listening to customers, and aligning to market inclinations every time to win such market needs as they arise. If a small business follows such a requirement of being proactive, then it will improve its profitability within no time.

Marketing is a vital tool in creating awareness of a firm’s products and services and can lead to a high sales volume. A small business can use marketing strategies such as personal selling, social media platforms, and other cheaper publicity to create their brand’s awareness. Through marketing strategies, the public is likely to recognize the products and services offered by a small firm and try to make purchases. If appealing, the sales made would attract more customers and give such a business a means to increase its profitability. Compared to large-sized firms, the marketing technique employed should be cheap as the cost element, which reduces profits, should be constantly monitored.

According to Pepaj (2018), a business owner needs to embrace some leadership skills that drive business profitability. For example, as a leader, the business owner needs to set goals, draw clear plans, understand and accept roles and responsibilities, motivate employees, and efficiently moderate the business’s business operations to run perfectly. With such leadership skills, the business is bound to experience some chance and record an increase in its profits. As a leader in your own business, it is recommended to draft a plan, which is a business’s life. The plan sets expected goals and a clear course of action in carrying out activities. As such, the business owner can notice deviations, correct them, and later lead the business in the path of generating profits.

A business builds profits from the relationship it develops with its customers when serving them. Therefore, developing reliable and deep relationships with customers is an important activity in ensuring that a business firm can make sales all the time. The relationship-building strategy can get cultivated by using various methods such as motivating employees who happen to have direct contact with the customer, giving discounts to customers, providing quality products and services, and rewarding customers annually on the grounds of their loyalty. When such relationships are built to become long-lasting, a small business is guaranteed to make sales and improve its profitability.

A business can earn profits by generally making sales in the market, but the market selection and targeting are likely to improve profitability. Small businesses can learn to identify and select markets to concentrate on delivering their products and services. The benefit accrued in concentrating in a particular niche market includes; creating brand awareness, product positioning, and customer loyalty, which is a sure way always to make sales. It would help a business to earn more profits besides the sales made generally. A business owner can obtain favor in customer and supplier bargaining power due to preciseness in the supplies delivered.

It is recommended for a business person to constantly evaluate the business environment and take advantage of arising opportunities such as increasing demand, and that can earn more profit. During high demand in the market, a small firm can adjust product prices slightly upward to benefit from the market’s excess demand (Cant, Wiid & Sephapo, (2016). Obviously, with high demand, supply is low, and customers are desperate to acquire items from the market. Therefore, it is no harm to slightly increase the prices that will help improve the firm’s profitability. When the demand goes down, it is also important for the business owner to keep an eye on such a change and lower prices. This helps prevent the possibility of scaring and driving customers away.

It is not advisable for a small business to give titles to employees but instead make everyone a salesperson. A business that treats every worker as a salesperson is likely to make more sales than one with positions such as; a director, accountant, or manager. When everyone is a salesperson, a synergy is created. Each individual contributes to winning customers to the firm rather than sitting at the back office, awaiting one or two workers to persuade customers. The selling effort will get maximized, more customers will get convinced to buy from your business, and the sales will increase the firm’s profitability. It also becomes a passion for doing business, and it makes everyone an expert in winning customers. Besides winning customers, such a small business is likely to gain efficiency, which is paramount to improving a business’s profitability.

There has been technological advancement currently, and many small businesses can utilize it to make more earnings. According to McIver (2019), it is easier and quicker to access information about the market movement and trends, thus predicting the market’s demand patterns. Small businesses can utilize market information to generate viable ideas for meeting the increasing demand or even counter competition by devising new trading methods. Besides, technology has made it easy to reach customers; for example, using the Facebook account, Instagram, and other social accounts to display products and services for the public to see. It is good for a business to use information-analytical tools to create some competitive advantage, win customers, and improve its financial performance.

Diversification is also an important means for a small business to improve its profitability. Most small business tends to get challenged by financial resources, and as such, they stick to trade only one product which in actual sense earns them very minimal returns (Zubareva, Kuramshina & Zavedeev, 2020). The situation can improve if such businesses add more related services or products to their shelves and trade them. All product lines may generate profits that would sum up to good profits compared to only one line expected to earn returns. Several products and service lines also seal and offset losses of one stream of income. For example, a business sells products A, B, and C in the market. If product A makes a loss, products B and C will offset such losses from their earned profits. The situation would be hurting if the business only specialized in a single product line A and suffered a loss.

Exploration of the market helps to increase the number of customers and consequently increase sales. Selling products in one region is bound to earn a business minimum returns due to sales by other similar firms around. A business owner can explore other markets and deliver their products and services and see if there can be a breakthrough. Trading in different market regions increases the profitability of a business. It gives it the chance to learn of new needs, exploit and expand, thus increasing that firm’s financial performance.

Business risks tend to lower profitability, making a firm struggle for a period before it can break. It is the nature of entrepreneurs to take risks, but high risks are not appropriate for a business that wants to improve its financial performance. As taking risks is the only way to make high returns, a business can utilize mechanisms to cover themselves against losses in an eventuality occurrence. A business firm can either decide to take up risks when investing more but take out an insurance policy that guarantees safety, or it can invest more and invest in portfolios that have lower risk margins. This way, a business is sure to operate to the maximum without the fear of losing its earnings. Another form of profiteering is engaging in real businesses that generate genuine profits and helps stay operational for the long term.

Compliance with the state agencies and applying the necessary business certifications is one profit-improving method undermined by small businesses. These businesses can follow the laid-out business registration processes and procedures and obtain licensing to avoid unnecessary interruptions when carrying out their businesses (Francisco, et al., 2020). It is notable that when businesses get interrupted by agencies for not complying, the business environment is not enhanced. As such, businesses get closed at any time and have less time to operate. They may lose profits with customers heading to those businesses that are open throughout and tend to meet their needs because the availability of products is important. Besides, compliance saves businesses the penalties charged and thus improve their profitability.

It is important to carry out regular reviews of your business as a way to improve its profitability. Many small businesses believe in stocking and selling to earn profits, but this is not enough and can lead the owner to limited profits. Ensuring that periodical reviews are performed helps a proprietor with insights and makes informed decisions that may lead to increased profits for the business (Alexander, Antony & Rodgers, 2019). For instance, some stocks may be slow, and lower prices can attract more sales and more profits. The reviews can also identify low-demand products on the shelves and get replaced with high-demand products, thus increasing the profitability of that business. Reviewing your business goes hand in hand with studying the environment, which is also dynamic, and ensuring that the reviews reflect the market’s needs. Therefore, a proper review aligned with the market would help realize an opportunity to earn more profits.

A business person should avoid general investment and focus on those products that have returned. Handling many product lines is considered an effective way of earning from different streams, but unfortunately, it may increase a business’s costs due to the acquisition of irrelevant stock. Focus drives differentiation and cost reduction and allows the business owner sufficient time to study the business, the market, and develop what customers need to buy more and generate high profits. As such, a business with a sense of focus can easily provide to the preciseness of market demand, make more sales, and generate high profits.

Conclusion

Despite their many challenges normally orchestrated by insufficient resources, small businesses can always make it successful in business. They have many avenues to carefully analyze depending on their size, location, and the market to change their operations and earn extra profits. However, the turnaround decision solely depends on the business owner and the goals at hand concerning their ventures.

Share this Post