During the final weeks of 2018, many small businesses reviewed the year’s worth of data to see what was preventing them from reaching their financial goals. It’s safe to say that at least a decent portion of the younger businesses arrived at a similar conclusion. Despite their strong sales, the business isn’t in the financial shape it should be. This suggests a problem with profitability. Younger and/or smaller businesses are particularly prone to such issues because with their limited resources, they aren’t exactly in the position to prioritize profitability when developing a business model. But profits must grow in order for a business to do the same. So, it’s time for these businesses to consider different culprits for leaking profits and make the necessary changes, since fixing just one thing likely won’t solve the entire problem.
A glance at today’s business funding options will reveal that there are now numerous ways to make sure the solution you need will not obstruct cash flow. Here are 4 reasons your small business might be losing profitability:
1. Keeping Prices Too Low
It’s extremely common for new small businesses to under-price their products or services. They are trying to take business away from their competitors and spread brand awareness. Sometimes, the easiest ways to accomplish both goals is to simply undercut your competitors’ prices. But as effective as this strategy can be in your early stages, it will no longer sustain your business once you begin hiring more employees and accruing more expenses. A look at your competitors’ prices will show that there probably isn’t much of a risk in a slight price increase, especially if most of your competitors charge more than you do.
A typical example of a slight increase is no more than 5%. Let’s say your business grossed $200,000 in sales in 2018. If you made the same sales this year but raised your prices just 2.5%, you could reap an extra $5,000 in profits.
2. High Shipping Costs
Any established business that sell shipped goods has likely accepted that shipping costs and other shipping issues will be an ongoing presence throughout their entire careers. It might seem that while your customers’ standards for shipping costs are decreasing every day, your shipping service is thinking of new ways to make you pay more. The fact that the costs for the labor and packaging supplies required to fill your orders is on the rise doesn’t help either.
This is why it is widely advised to compare the shipping rates of all primary carriers once a year, at least. In addition to overall prices, compare numbers for package sizes, weight, and the locations you ship to most often. Some services tack on surcharges for certain types of orders, like shipping to residential addresses. You might discover that your solution is more simple than you thought, like using the smallest possible packaging that will not damage your products upon arrival.
3. High Cost of Goods Sold
New businesses usually don’t even bother trying to negotiate prices for inventory or supplies. Vendors have never heard of them and therefore have no reason to believe they will be able to sell their products. This changes, however, once the business amasses a solid track record of orders that are great in size or frequency. At this point, it is considered appropriate to ask for a discount. There’s a chance the vendor won’t give you a discount now but will promise one in the not-so-distant future. The vendor might also offer quantity discounts, though these only make sense if you are positive you’ll be able to sell the inventory on the faster side and it will save you money on shipping costs.
At United Capital Source, we work with myriad clients that benefit from various forms of inventory management. While a retail store might order several seasons’ worth of items, medical practices are more inclined to place orders at the last minute before a busy period. Liquor stores are now recommended to turn their entire inventory as much as nine times per year. With the right small business loan for your preferred management system, you can dramatically decrease the risk of ordering too many items or keeping items on your shelves for too long. Most of our business funding programs, which include revenue based business loans, business lines of credit, and a merchant cash advance, can be approved at almost any stage of your financial cycle. This allows you to order inventory at the right time without preventing you from cover regular business expenses.
4. Unnecessary Costs Of Expenses
When you think of business services, the first things that come to mind are probably Internet services, telephone, electricity, or smartphone data services. But while you might not be able to get better rates for these services, there’s another one you might be forgetting: your credit card vendor. If your business has grown significantly as of late, you might be eligible for lower fees, lower minimum monthly payments, or a new, better business credit card altogether.
There’s always more you can do to improve profitability. The solutions might not be so obvious, though. Companies like United Capital Source can offer you different strategies for improving profitability along with the means to execute them as soon as possible, even during a lean period. And unlike other business lenders, our business funding options were designed with your profitability in mind. This is achieved through long term solutions that will leave you financially secure well after you’ve made your final payment.