Profitability in SMEs, 10 tips to increase it
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In a business environment dominated by SMEs, boosting the profitability of these businesses implies, in turn, boosting the profitability of the national economy. The reasons why a business stops being profitable can be very varied.
Therefore, it is important to find the source and tackle the problem. However, as explained by Datisa, many times, the response focuses on the immediate search for new business or customers, without identifying the cause of the drop in profitability.
“Sales are crucial. They are the soul of any business. But, when we talk about profitability, we don’t always have to go to the commercial area in the first place”, explains Pablo Couso, commercial director of Datisa.
Profitability in SMEs
These are the company’s 10 recommendations to increase profitability in SMEs:
- Review the costs of purchase, production, generation of the service, When was the last time these costs were reviewed? Have prices increased or decreased since then? How do these changes affect profitability? Defining a “solid” business process involves periodically reviewing the agreements with suppliers to renegotiate prices and service conditions. To do it with guarantees, the administration area must generate reports on price and supplier histories. With these data, it will be possible to identify which are the key suppliers. Or how their prices have evolved.
- Examine the cost of personnel, The key is to understand which tasks within a process are tedious, repetitive and time consuming. Using this information is key to identifying what real opportunities exist to increase productivity and improve processes through automation.
- Investigate overhead, In this case, the key is to be able to see, at any time, the adjustment of these expenses to the budget established at the beginning of the year. That is, plan and correct deviations. In this sense, it would be good to do a monthly review and check compliance. An expense report will show your evolution and deviation from budgets. And, it will facilitate the imposition of corrective or driving measures depending on the information provided by the figures.
10 tips to increase profitability in SMEs
- Check profitability by product/service, Delving into this level of detail ensures that the overall profitability of the business will not be negatively affected by a particular offering. Knowing which products/services work best, provide more margin, are more profitable, in short, helps eliminate any “dead weight” that may be losing money.
- Increase prices in certain markets, Yes. Prices can be raised. But, first you have to do an analysis of the competition and compare your own prices with those of other organizations in the sector: This will make it easier to decide on which areas to increase the price. Or about which ones are better to keep or even reduce. Gradual increases help control how they affect sales. And, also, to profitability. Any change in prices will affect the income statement, so any action carried out must be done taking into account the impact -positive or negative- on the business.
- Improve financial control, One of the essential points to boost the profitability of a business is to have exhaustive financial control. It is the way to make intelligent decisions, based on the accuracy of the data. Many times, SMEs find it difficult to understand what payments they must make, or what, when and how the collections will be made. Without this clear information it is impossible to get the forecast of income and expenses right. Nor planning possible investments. Or take advantage of business opportunities. Or deal with any incident that may occur. This lack of foresight also affects order and stock management. Storing too much can cause financial problems. And not buying enough can lead to a serious reputational crisis. In both cases, profitability will be affected.
- Dedicate time to training People are the greatest asset of a business. And it’s also usually the most expensive part of the business. Team development improves performance and makes the business more profitable. But, not all SMEs spend enough time on their business conversion rate. This is where the number of leads is controlled. And where offers are compared against closed operations. The formation of the commercial team will improve the conversion rate. And that will make the team -and, therefore, the business- more profitable.
- Improve or expand the current offer, Is it possible to sell in large volumes or upsell? If the products/services are sold in batches or vouchers of 10, could they be increased to 15 or 20? Improving, complementing or adding additional products/services is also a good way to increase the value of each sale. And, thus improve profitability. Often times, things as simple as an express delivery service or flexibility in payment terms can add a few extra points to the bottom line.
- Check the KPIs, Many times sales teams have goals based on the number of accounts they create. Or in the number of operations they manage. Or in the value of the sales they make. But why not think about goals aimed at contributing to gross profit? These goals can be established in geographical areas, or in business areas, or even in product/service lines. Putting the focus on profitability within the KPIs is a smart way to make the business itself oriented towards improving the profitability of each sales opportunity.
- Look for the support of technology, Technology is the perfect ally for SMEs to boost their profitability. It facilitates the efficient and intelligent management of the business, making all procedures faster and easier. And, above all, safer. An ERP provides clear information about customers, suppliers, products/services, collections, payments,… In addition, it automates repetitive and low-value tasks. Therefore, in addition to making the teams more efficient -ergo, profitable- it facilitates decision-making, providing and promoting the exchange of accurate and updated information in real time.