3 Key Ways to Start Prioritizing Your Profit Margin
For most women business owners, passion is one of the biggest driving forces behind their company. You start out with an idea or a dream to do what you love and (hopefully) make some money doing it.
But herein lies the caveat most women business owners face, often without even realizing it — putting passion over profit. Let me explain …
Putting passion over profit doesn’t mean you’re not focused on bringing money in. However, when it comes to setting fees and price points, women entrepreneurs often focus too much on revenue, rather than overall profit.
But when you approach business this way, the prospect of achieving profit becomes more of a game of chance, rather than another point of strategy.
While revenue may be an immediate objective, profit is the long-term goal — and what will drive your successful growth over time.
Here are 3 ways to take the reins on your financial success and plan for profit:
- Create a Strategic Plan
I know what you’re thinking: “But Marilyn, I already make a yearly financial plan…”
But here’s the catch — many women entrepreneurs base their spending plan solely on past spending trends. There’s a good chance you’re primarily looking at this year’s expenses to build next year’s budget.
While you may be considering changes such as possible price increases or rolling out new products and services, knowing what you want to do and even planning for it is not the same as creating and implementing a strategic plan.
Building a strategic plan is a matter of knowing and understanding the relationships between all the relevant numbers. For example, you’ll need to consider how much you can spend safely on business expenses and other items while keeping in mind potential roadblocks like cash flow crunches, industry changes, economic downturns, and more.
Your budget should be drawn from your strategic plan (not the other way around) and used to set priorities, monitor performance, and drive important business decisions.
- Charge What You’re Worth
One of the biggest ways we, as women entrepreneurs, get in the way of our company’s growth is by undervaluing our products and services. For many women, it’s uncomfortable to talk about prices. When a client or customer challenges those fees, we often second-guess ourselves and feel compelled to give in to our “people pleaser” instincts.
As a result, we end up undercharging, yet over-delivering and short-changing ourselves in the process. Unless you break this cycle, not only are you practically guaranteed to burn out, your bottom line will continue to take the hit, leaving your business starved for cash.
If you suspect you may be undercharging, try taking a step back and reevaluating how much value you add to your clients’ and customers’ lives. Then take that insight and compare it to how much you’re charging. If you discover that you aren’t charging what your services are worth, it’s time to raise your fees.
Don’t be afraid to make quite a jump. Recognize what you bring to the table and remind yourself that you are worth every penny.
- Shine the Spotlight on 2 Key Numbers
Crunching numbers and running a business go hand-in-hand, but when it comes to hammering out your plan for profit, there are two categories of finances you’ll want to focus on: Your Gross Profit and your Net Profit.
Gross Profit is the amount of profit that you can directly attribute to the product or service sold. You calculate Gross Profit by taking the price at which you sold your product or service, and then subtracting any direct expenses associated with that product or service. This includes salaries of staff for time spent working on the client’s account, as well as software, tools, assessments or other components directly related to the service, such as travel, lodging and meals.
Net Profit is the amount of your profit left afterpaying all of your expenses, including overhead for items not specifically related to the cost of your products and/or services, including operating expenses such as your salary, office rent, supplies, utilities, etc.
You’ll want to analyze both numbers as a percentage of revenue. To get the most value and information from each, be sure to track:
- Gross Profit Percentage (GPP) and Net Profit Percentage (NPP) for the current fiscal year, annualized.
- GPP and NPP for last fiscal year.
- GPP and NPP for two fiscal years ago.
This way you’ll be able to clearly see if you’re on track to reach the gross and net profit goals you’ve set for each respective category for the current year, while taking note of possible trends over time.
For example, when your GPP drops, it might be a sign that your expenses are inflating, your sales team is discounting too often, or it’s time to raise prices.
If you notice your NPP shrinking, it may be a sign to look more closely at your operating expenses. On the flipside, it could be a sign that your annual revenue is not keeping pace with where it needs to be.
Plan for Profit to Hit Your Business Goals
Managing profit is one of the most important ways to ensure that you hit your business goals, not just for the year, but for future growth.
If you want expert insight on how you can plan and manage your profit – let’s chat!
Book a 45-minute, no-obligation Financial Strategies and Solutions Session with one of our highly trained virtual CFOs.
