How can a small business increase its profit? By increasing sales -- this is the answer that immediately comes up to mind. Not an iota of doubt. Large or small, sales is the lifeblood of any business, and unless the sales funnel is kept constantly fed with new opportunities, profits cannot be sustained. So, we business people always keep working feverishly on increasing sales, but in that hurry many of us often fail to see some hidden profit pitfalls that can make significant difference to the bottom-line of our business.
Over-staffing, for example is a potential profit drain, and many a small and mid-sized business owner makes this mistake. When it comes to hiring, they don't give much thought to it -- no ratio of income and overhead to employees is maintained, crucial factors like projected cash flow, projected sales or sales cycle are not taken into consideration, hiring is upped during peak season and when lean season comes they find themselves with more workers than needed, and as a result money is wasted. I think these kinds of drawbacks can easily be removed just by bit of planning.
It is important for every small business to get grips with expenses. Rushing to spend all the capital within the first year or so, committing too early to high recurring overheads in the form of rent or lease agreement, pulling out profits too early not giving much thought to reinvestment, and most importantly failing to choose a lean business model -- these profit pitfalls can break a small business. But again, it is not that difficult reign on them. Just keeping your eyes open can make a lot of difference.
Advertising is another area where small firms often do it wrong. Cost-effective advertising mediums are a boon to small business, but many fail to make the best of these mediums, such as email marketing, pamphlets as newspaper add-on, online B2B platforms, etc. Instead of choosing advertising just for the sake of advertising, a small business should carefully work out what their target market and choose advertising mediums accordingly. It takes planning and testing to make sure that money is not wasted in the name of advertising.
Finally, I want to say a few words about inventory management. High inventory means cash tied up -- it is not going to earn any interest, in contrast, with every passing day, inventory becomes less valuable, and therefore I think a small business should not carry any more inventory than is absolutely necessary. I'm not saying that a small business should keep too little inventory, but identifying the minimum level of stocks it can tolerate and arriving at a balance between holding too much or too little stocks is important for every small business.