Three Steps to Make Profit a Deliberate Outcome Rather Than a Game of Chance
Do you love what you do – even if your business may not be generating the profit it should? (Or, perhaps, are you not even clear on what your business should – and could – be generating?)
You’re not alone. Many women entrepreneurs started their businesses from a desire to follow their passions while simultaneously earning an income. But too often, passion is prioritized over financial profitability.
Placing passion before profit doesn’t inherently mean a disinterest in making money. But it can lead to a too-common mistake of concentrating on immediate revenue when setting prices and fee structures, rather than considering the larger goal of profit. Generating a profit becomes a matter of chance rather than a deliberate plan.
In handling your business’s finances, it’s natural to be concerned with immediate revenue. You need revenue to meet payroll and cover overhead. However, the point of a business is to generate profit. Your ultimate goal should be a sustainable and incrementally increasing profit, as this is what drives long-term growth in a business.
Below are three essential steps to take control of your financial destiny and chart a course towards profitability.
Step 1: Develop a Thoughtful Financial Strategy
You might think, “But I already create an annual financial plan.” Here’s the important distinction if you’re shifting gear to focus on your profit margin. Many women entrepreneurs base their budgets solely on past spending patterns. It’s probable that you’re using this year’s expenses as a basis for next year’s budget.
Planning for possible price increases or new product introductions is different from crafting and executing a well-informed financial strategic plan that’s designed to produce a specified profit.
A perceptive financial strategy understands and interprets the complex relationships between various financial figures. It evaluates what overhead the business can afford and considers challenges like cash flow limits, economic fluctuations, industry shifts, and more. A strategic financial plan begins with your vision for your company and how you wish to serve your clients, then projects the revenue to be generated and the expenses involved.
Your budget should emerge from this all-encompassing strategy, steering your priorities, tracking progress, and impacting vital business decisions. Instead of being led by past trends, define your direction and devise a financial strategy to reach your goals.
Step 2: Identify and Assert Your True Value
A major hurdle for many women entrepreneurs is undervaluing their services. Many women CEOs confess to feeling uneasy when discussing prices. If clients question their fees, they often face self-doubt, leading to underpricing and offering discounts to appease the client.
If not addressed, this pattern of undercharging and overdelivering can rob the business of rightful revenue. To break this cycle, assess the concrete value your services provide to your clients. Contrast this value against your pricing structure. If there’s a mismatch and you’re undervaluing your services, it’s time to adjust your fees.
Embrace the uniqueness of your offerings and confidently stand by your value.
Step 3: Prioritize Two Key Financial Indicators
Understanding and watching your key financial numbers is crucial in business management. When forming a plan focused on profit, two financial categories are of utmost importance: Gross Profit and Net Profit.
Gross Profit refers to the profit directly related to your product or service sale. It’s calculated by subtracting the direct costs associated with the product or service from its selling price. This includes employee salaries specific to that service, software, tools, and related expenses.
Net Profit is what you have left after covering all general overheads, which are not directly related to your product or service costs. This covers operational expenses like staff salaries, rent, utilities, and more.
Both metrics should be analyzed in terms of revenue percentages. For practical insights, track:
• The current year’s Gross Profit Percentage (GPP) and Net Profit Percentage (NPP), annualized
• GPP and NPP from the last fiscal year
• GPP and NPP from two fiscal years ago
Monitoring these figures helps you understand how well you are meeting your gross and net profit goals and spot trends.
A shrinking GPP might suggest rising costs, frequent sales discounts, or the need for price adjustments. A decreasing NPP could signal a need to review operational expenses or that annual revenue isn’t meeting expectations.
Plan for Profit to Reach Business Goals
Strategically managing profits is crucial not just for yearly goals, but also for the broader vision of sustained business growth. For women entrepreneurs, adopting this approach ensures that passion and profitability complement each other, rather than being mutually exclusive.
By applying these strategies and cultivating a profit-first mindset, businesses can not only meet their financial targets but also establish a robust foundation. This foundation guarantees ongoing growth and success, enabling women business owners to achieve their utmost potential and redefine success on their own terms.