This post is one of many in a series we’re calling, Bookkeeping 101. In this article, we’ll teach you how to increase financial margins in your business.
One of the most important objectives of running a small business is maximizing financial margins. Before we can talk about how to increase them, though, we need to define what we mean by “margins.”
Margins are defined as net income divided by revenue. They are an indicator of how much money you make from each dollar that comes into your company. We’ll talk more about how to calculate your margins later, but first, let’s define another term we’ve used “net income.”
Net Income is a company’s total earnings after all revenue has been accounted for and all expenses have been deducted from it. While revenue is the total amount of money that a company makes, net income is the money remaining after paying all expenses.
Net Income = Total Revenue – Expenses
Expenses include every cost incurred by running a business including rent, utilities, accounting fees, and salaries for employees among others.
Now, back to margins.
There are two primary ways businesses can increase margins:
- Increasing revenue
- Decreasing expenses
Increasing Revenue
In order to increase revenue, businesses can do one of two things:
- Increase prices
- Sell more products or services
Increasing prices can mean charging more for the same product or service. As a small business owner, it can be easier to increase margins by increasing prices to a level that is profitable enough for your business.
Selling more products and services can be difficult for many businesses but it ultimately leads to an increase in revenue. Selling more requires working harder, smarter, and/or longer hours. This typically guarantees a rise in operating expenses because it costs money to produce more of something. Whether it be hiring more people, buying more materials, or manufacturing more items your cost of business increases.
Decreasing Expenses
Decreasing expenses is another way to increase margins. As a small business owner, you have complete control and flexibility when it comes to your spending habits.
It’s important that every dollar spent on operating costs has an equal or greater return in revenue generated for the company. Even though this may be difficult for some businesses to do, there are multiple ways to cut costs.
Some ways to reduce expenses include:
- Renegotiating contracts
- Buying used equipment or machinery instead of new ones
- Outsourcing work (if possible)
- Reducing time spent on certain tasks by delegating responsibility to employees
Decreasing operating expenses can be as easy as cutting back on unnecessary spending. It can also mean making hard decisions that change the way you do business. This could include changing the way you train employees, outsourcing work, or making employee cutbacks.
As a business matures, its sources of revenue become more diverse and expenses become more complex. This makes it difficult to determine WHAT exactly they should do to increase margins. This isn’t bad, it just means is a business may need some help finding ways to increase revenue and decrease expenses.
There is no one-size-fits-all solution when it comes to increasing financial margin, but our team can help. We are experts at finding solutions to your business’s unique financial needs.
If you would like to increase margins in your small business but don’t know where to start, let’s have a conversation. Still Water Financial Operations exists to help your company become as profitable as possible and we can help.
Schedule a conversation with us at this link and let’s start the journey of helping you make more money.