It’s not enough to know if your business is profitable. You also need to make sure it’s sustainable. Many small businesses get by on high margins and low volume, which can be a recipe for disaster when the economy goes south or consumers change their buying patterns. Your goal should be to start at the top of the food chain in terms of profitability while still being able to maintain that position during an economic downturn or other major changes in consumer behavior. This article will discuss about 5 methods that you can use to make sure your business is making the most out of each customer.
Look at Company Revenues vs. Costs
The first place to start when trying to figure out if your business is profitable is by looking at how much revenue you get from your customers compared with your expenses, which should include both fixed and variable costs. In most cases, you want to make more money from your customers than you spend on them. You’ll need a good grasp of every aspect of the business to appropriately allocate costs with this method, as well as a firm understanding of basic accounting principles and practices.
Check Inventory Levels
If your inventory levels are consistently low, it typically is a sign that either the business is losing money or it’s not generating enough sales to support its current inventory levels. The latter scenario may be an indicator of poor marketing, difficulties in making/delivering goods, or weak customer demand due to low prices and stiff competition.
If you’ve been in business for a while, it may be easier to look at trends rather than try to analyze revenue and costs on a daily or weekly basis. If you’re seeing the number of customers increase over time but few are making purchases, there’s likely an issue with demand.
Compare Prices to Competitors
If your prices are out of line with competitors, the problem may be the former or it could be a sign that there’s a flaw in your marketing, processes, materials or customer service. All of these factors should align with your business strategy to keep costs where they need to be for profitability and to attract customers, who will help contribute to sustained growth, click here.
Is the store in a retail mall with high traffic or in a strip center with little foot traffic? Is your business in an upscale downtown location or in a small town on the outskirts of the city? While you shouldn’t base all your decisions on where to locate based on these factors, they should be considered if you’re trying to determine if your business is profitable.
Usually the case with small business, you’re not going to get every figure right when trying to determine if your business is profitable. However, these methods should help provide a good idea of whether there could be issues that need to be addressed as soon as possible as well as those that can wait until later down the road.