Profit Tips
Consider the following ideas for saving time and money and making your business more profitable.
1. Develop tight controls over billing and collections. To speed up cash flow, reduce the time between shipping your product and sending an invoice. Consider semimonthly instead of monthly billing, and send second notices more quickly.
2. Collect past-due receivables. Almost every business has past-due receivables. Phone the people who owe you the most money, and try to resolve the problem on the spot. If you can’t collect the total immediately, try to negotiate a payment schedule, or schedule a follow-up call.
3. Watch your payables. Don’t be one of the many businesses that overpay vendors due to sloppy accounts payable procedures. Go over these rules with your accounts payable clerk:
- Don’t pay vendors twice (or more) for the same invoice.
- Don’t pay for goods that you return to the vendor; check the invoice to be sure an adjustment has been made.
- Keep track of credit memo allowances you receive and subtract them from the next invoice.
- Be sure to take discounts for early payments when they apply.
- Don’t pay for charges that are incorrectly included on the invoice, such as shipping charges the vendor agreed to pay.
4. Keep payroll costs under control. Payroll costs are a major item in most businesses. Perhaps a more efficient plant layout or work schedule would result in reduced labor needs. Consider the use of temporary employees and subcontractors if your business is subject to seasonal variations.
Review employee classifications for workers’ compensation insurance. Improperly classified workers can be costing you significant premiums. Review group insurance programs. Solicit bids for the programs every three years. Consider higher deductibles as a means to lower premiums.
5. Watch those numbers. Use your financial statements to give you important management information. Compare inventory turnover (cost of sales divided by average inventory) year by year. If turnover drops, consider it a warning sign and investigate further.
Compare your gross profit margin (sales less cost of products sold) from year to year. A decreasing profit margin may be a danger sign; it should be checked as soon as it is spotted.
If you sell a number of different products, determine their individual gross profit margins and their mix. Give particular attention to low-margin products to see if it’s still worthwhile to carry them.
6. Use prior financial statements as a guide to prepare budgets and long-range projections. Actual results should be compared to these projections to highlight areas needing attention before major problems develop.
7. Use your advisors wisely. Keep your accountant, banker, insurance agent, and lawyer informed about your business. These professionals consult regularly with many other businesses and can help you avoid pitfalls in making business decisions.
There are other business management strategies in addition to those mentioned here. As your business needs grow and change, our staff can provide input and planning assistance to make sure your accounting and financial systems keep pace with your business needs. Contact our office to learn more.
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