Back to Blog
A profit margin is the basic means of small business accounting to gain insight into how much money your business is making, the general health of your business, and the problems within your business. Therefore, all small business owners should consider this metric: the profit margin. Profit margin is calculated on the percentage of sales that have turned into profits, i.e. dividing the net income by sales.
There are times when you don’t meet the profit expectations that you have set for your business. At times like these, you need to know why the profit margin is below expectations and make necessary adjustments in your business functions. If you want to know how to troubleshoot your profit margins, here are some of our tips to consider.
Gather Insights and Analysis from Annual Trends
Let’s start with looking at the income statements from the past years of the business. Look for the things that were driving the profits each year. Were there any seasonal surges or a pause in the statistics? How did the product perform in the respective years? Did increased competition affect your sales? Was there any poor execution of sales strategies? Performing this analysis and getting answers to these questions can help you drill down to the reason for stopping the sales of your products or services. Brainstorm the solutions to reduce the impact if the same circumstances still occur and affect your performance.
Compare Yourself to the Competition
Knowing how to stack up to the competition shows how well you are doing and decide your future strategies. Look up at your competitors and compare the profit margin of your competitor. When you compare your business strategies - such as marketing, targeting, and providing customer services - with your competitors, you re-analyze the root causes of the problems that are becoming an obstacle in your sales. Make a note of all the things that you like about your competitors that are also working well for them, and look for ways to inculcate the same in your business functions.
Consider Re-pricing Your Products
There is a possibility that your business is doing more while maintaining equivalent overhead expenses. To increase your revenue strategy, you need to choose a low-price strategy, i.e. reduce your selling price to increase revenue. By using this strategy, you should see a pick-up revenue assuming that your customers are price-sensitive. For instance, a car manufacturer that produces luxury cars will sell fewer models because of their high price tag. The strategy is to raise the prices and sacrifice the volume and operating costs by making more money on every sale.
On the other hand, the car manufacturer with economy cars will make less profit margin but can sell more cars since their customers can afford the price. Both the strategies are effective, but the execution of these strategies depends on the type of business and your customer’s tolerance level.
Here is how you can determine the price of the product:
For example, if you need to make a 15% profit on a product with the selling price of CAD 18, you need to subtract the profit percentage that you want from 1. Let’s say the factor is 0.85 (1-0.15). To calculate the selling price of the product, divide the original cost (18) by the factor 0.85. Therefore, you need to sell the product for CAD 21.17 to receive a 15% profit margin for your business. You can talk to your business’s financial analyst and small business accounting expert to price the products rightly.
When you know your profit margin, you can uncover your spending practices or make decisions to cut costs in certain areas. It is all about keeping overhead costs as low as possible to produce a quality business product. The formula of the cost of goods sold for small business accounting is:
Beginning inventory + purchases during the period - Ending inventory
You can reduce inventory costs by purchasing in bulk, taking advantage of supplier discounts, and negotiating terms with the suppliers. Try to cut back the cost of goods sold to the extent that it positively affect sales.
Cut Underperforming Products or Services
Making this call is completely yours. If you have certain products that are not doing well in the market, try to pull them out of the market. This might help you trim the cost, and you can use that cost to bring up the profit margin percentage. You can even reduce your staff members if the salary is becoming a considerable expense item in your small business accounting books.
Review Profit Margins as Monthly Practice
As a small business owner, you should always know how your business is spending money. It is important to improve your profit margin to track the expenses. A well-run business looks at the numbers in their small business accounting monthly. All successful companies go through this necessary exercise. If your numbers are different from one or two percent, that is not significant and can be controlled. But when the numbers differ by five percent or more, then it indicates that there are things that need to change. Analyzing the margins is a great diagnostic tool for monitoring the health of your business.
Consult a Professional
Sometimes, you can’t identify the core issues to troubleshoot your profit margins no matter how many strategies you use. If you are still baffled about why profit margins aren’t where you thought they would be, try consulting a professional small business accounting expert. An outsourced small business accounting firm can bring your objective view of the situation and identify the core issues of the problem.
Remember that profits are nice, but the margins are even better. Do your research and make sure you track the numbers down to every last expenditure and revenue source. Knowing where your small business accounting is along with your profit margin will help you determine where to go next.
Back to Blog
Businesses, both large and small, face a number of risks. Risks are an inevitable part of the business. The uncertainties in the business can be changed daily depending on your business. Many Canadian business owners should identify the pressing risks their businesses face. For an entrepreneur to identify the risks in the business and equip the enterprise with risk management strategies, it is important to conduct a risk assessment round in your business. So, here is a step-by-step guide for the small and medium businesses to assess the risks in the business.
Identify the Risks
A risk can be internal (risks inside of your operations) and external (outside of your business). Internal risks are only specific to your business and easier to control than the external risks such as:
- Financial risks
- Marketing risks
- Operational risks
- Workforce risks
External risks are usually out of your control such as:
- Changing the economy
- New competitors
- Natural disasters
- Government regulations
- Consumer demand changes
Once you identify the types of risks that your business is financially exposed to, segregate the risks as external and internal risk to know the risks that you can control and the ones that you don’t. You can even identify your financial risks by hiring the right accounting service provider for small business.
Assess the Risks
When you list down the types of risk that your business is exposed to, you need to determine the severity of the uncertainty in the financial aspect. Create a risk rating matrix to identify the risks that can cause severe damage to your business finances and the practical measures to manage the financial risk. Then, create a table as given below:
Risk rating level needed
- Critical - Immediate action is required
- High - Action needed quickly (within 1-2 days)
- Moderate - Action required with a week
- Low - Required action with a reasonable period (2-4 weeks)
- Very low - Risk can be eliminated or lowered easily with time
Control the Risks
Once you rate the risk in your risk rating matrix, understand various risk control measures that can help you control or eliminate the risk. Risk control is a set of methods by which firms evaluate potential losses and take action to reduce or eliminate the risks.
Figure out controls by looking at the patterns over time, assessing their impacts, and also the likelihood of occurring again. Here are some of the risk control techniques:
Eliminate it - You can avoid the risk of eliminating the core problem. For instance, if you discover certain chemicals used in your manufacturing company that is dangerous for your employee's health, as the owner, you substitute the chemical with a safe alternative to protect your worker’s health.
Prevent it - When there is a risk, you try to minimize the risk as eliminating it will cost you a lot. For instance, if you have something in your inventory that is susceptible to theft, you can include patrolling security guards in your security plan, install video cameras or use advanced storage facilities.
Reduce it - Some risks can be avoided, but you can always limit the losses when the threat occurs. For instance, if your company stores hazardous materials in a warehouse, you might install water sprinklers to reduce the damage when there is a fire threat. You may also use insurance as a risk control measure to protect the things that are susceptible to catching fire.
Transfer it - If your business deals with multiple lines of business offering such as a variety of products and services, try to analyze the risks differently. Consult a professional financing firm offering all types of accounting services.
Practice the Risk Control Measures
Once you have decided the risk control measures for the respective risk that you have listed, you need to test the effectiveness of your risk management approach and controls. When you execute your risk control measure strategies, you can determine the best strategy to control that particular risk. Not every risk technique will be the golden bullet to keep your business away from the potential risk. As said earlier, risks in the business change every day, and therefore, you need to find a solution that is flexible and effective enough even when the risks change. You can always depend on the financial accounting service provider to help you tackle the right risk control measures for your business.
Monitor and Review
When you find the right risk control strategy, you need to monitor the performance of your risk control measures periodically. Regular evaluations of the risk by an accounting service provider will help you out in knowing things such as:
- What does the management think of the controls?
- What does your financial team think about the controls?
- Is the control still relevant?
- Did the nature of the financial risk change?
- Are the controls still in place and active as planned?
Prioritize the risk that needs your attention and efforts. You can quickly assess the risk if it has achieved its goals or control the risks in several ways such as:
- Consulting your team involved with the control measures
- Consulting your management who administer the controls
- Checking the performance reports regularly with the accounting service provider
- Physically check the conditions of the controls
It is essential for your team to know about the control measures and the purpose of implementing the risk control measure. When you and your team are on the same page, your company can successfully reduce or eliminate the risk more effectively.
Risk assessment is a living process, and when it comes to assessing financial risk, you need to seek assistance from a professional accounting service provider. So keep track of your business debts, incomes, expenses, and maintain financial statements and assess the risk accordingly.