Four Ways to Increase Business Profitability
When you’re just starting out in business, it’s a safe bet that you
need more clients. But what if you have been up and running for a
while, and you’re still not making as much money as you would like?
You may be in the habit of thinking that attracting new clients is
the answer, but this isn’t always the case.
There are many reasons why a professional services business might not
be earning enough, but they typically fall into four categories: not
enough revenue, not enough profit, not enough customers, or not
Start by looking at your gross revenue — the total amount your
customers pay you over the course of a year. How does it compare to
others in the same line of business? Ask some trusted colleagues or
check with your professional association for any statistics they may
What percentage of your gross revenue remains after you cover cost of
sales? This is your gross profit. As a service business, you may have
no cost of sales. If, however, you are selling books, tapes or
software, or accepting credit cards, your inventory cost and credit
card fees need to be deducted from your earnings before making other
Now deduct your business expenses from your gross profit. What
percentage of gross profit remains? Is this a typical percentage for
your industry? If you can’t gather comparable data from colleagues,
your professional association, or a published source like Dun &
Bradstreet’s “Industry Norms & Key Business Ratios,” compare your
profit margin (net income divided by gross profit) to a desired goal
LOW REVENUE – If your gross revenue seems low for your industry, your
profit margin is at least 70%, and you have about as many customers
as you can comfortably serve, concentrate on increasing your revenue,
rather than trying to improve your profit margin or bring in new
Consider raising your rates, which may mean finding a market that is
willing to pay more. Look for customers who will give you higher
dollar volume contracts or place larger orders. Think about hiring
more administrative help, which would free up more of your time to
charge out at professional rates. You should also work to increase
your passive income by selling products created by you or others,
reselling some of your existing work, or licensing a process you have
LOW PROFITS – If you are spending more than 30% of your gross profit
on overhead and marketing, work on improving your profits. Look for
ways to cut expenses by reducing your overhead, or focusing on your
most profitable line of business.
In addition, if more than 15% of your gross profit is spent on
marketing alone (assuming you are not a start-up business), consider
cutting back on advertising or mailings, and using more
referral-based marketing strategies. Seek out customers who will give
you repeat business or long-term contracts.
TOO FEW CUSTOMERS – Low revenue combined with not enough billable
work to keep you busy means you really don’t have enough customers.
If you don’t have a marketing plan, it’s time to create one. Focus
your plan on the most attractive service you have to offer and the
most lucrative market, rather than diffusing your energy by marketing
several different service lines to more than one type of customer.
If you already have a marketing plan, but it’s not paying off, you
may need to break into a new market, look for a more appealing way to
package your services, or form an alliance with someone who can send
a steady stream of business your way.
TOO LITTLE TIME – It’s possible that you simply don’t have enough
time to earn more money. When you are consistently spending over 25
hours per week serving clients, with more potential customers in the
pipeline than you can realistically serve, it’s time to hire an
employee or bring in a junior partner. If you’re not ready to take
that step, think about subcontracting work to a trusted associate,
and keeping a percentage of their billings.
In reading the suggestions above, you may have discovered that you
don’t have enough information to diagnose your earnings problem.
There are six statistics every service business owner should know:
revenue, expenses, profit margin, number of customers, average sale
amount, and billable time. If you don’t have the answers, start
tracking these measurements today.
C.J. Hayden is the author of Get Clients NOW! Thousands of business owners and salespeople have used her simple sales and marketing
system to double or triple their income. Get a free copy of “Five Secrets to Finding All the Clients You’ll Ever Need” at http://www.getclientsnow.com.