More often than not when we think about boosting our profits, we first turn to cutting costs. It’s always a good idea to keep your eyes on your costs and trim any unnecessary expenses. I also want to share with you some great tips to boosting your profits from the sales and income side of your business.

1. Raise Prices
Yes, I know this is a no brainer. I understand that sometimes your industry will set prices for you. However, I challenge you to forget about what your industry pricing standards for a minute. What can you do to set yourself apart from the crowd? What can you do to add more value to your customers? More value will result in being able to charge higher prices!

2. Changes in the Economy
One of my mentors taught me not to be afraid of a declining economy. Instead, use it as an opportunity to gain more business. At first I thought he was crazy. Believe it or not, it actually works! Most people will freak out with the down economy and not be looking to make changes. This creates an even bigger opportunity for you! Think about it, with each swing in the economy, people feel different pain points. What are those pain points? Can you build a product or service to help people relieve these pain points?

3. New Regulations and Laws
Are the laws and regulations in your industry changing? Be on the front end of these new rules. You can become the industry expert on these new regulations and help everyone else navigate the changes.

4. Repackage Your Current Products & Services
What are you currently selling? How can you repackage these products and services to attract new customers or sell more to your current customers? One ideas is to take a couple of your blog posts and put them together to make an ebook to sell on your website. Another idea is to group a couple products and/or services together and sell them as a package deal. It not’s always about creating a new product line. Think about what you already have on hand, how you can give it a new, fresh and updated purpose?

5. Build a Community
How can you bring your customers together and build a community? This works well because it gives your customers a sense a belonging. Crazy me signed up for 2 triathlons this summer. The fitness stores sponsoring the events are doing an incredible job at building a community for us race participants. We all share the same common goal – training for the triathlon. The fitness clothing stores are continually hosting clinics, panel speakers, training classes, fitness classes, etc all geared towards getting us ready for the race. Not only does this create a sense of community, but it gets us into their store. Not only is it building goodwill for the fitness clothing store, but once I’m there, yes I’m tempted to buy a cute new running skirt or new new pair of bike socks.

Another idea I’ve seen is building a community through a private Facebook group. This works great if you’re a business coach. Invite your clients to join your private group. Then let everyone interact. It lets your customers network, share ideas, and offer their expertise to better everyone’s businesses. The best part is that this awesome community you created will generate new business for you!

Where Do You Go From Here?
It’s easy! Take a look around. How can you recreate yourself, your business and your products? What can you do to reinvent yourself and your business? Don’t forget to keep it simple. Sometimes the best ideas are those that can be easily implemented but have the most impact on your customers. These new ideas can help boost your profits!

Last time I shared with you how to calculate your company’s break-even point. We learned that either raising prices or lowering costs will help you break even and start making a profit. Today I want to share with you the dangers of lowering your expenses.

When trying to operate a successful and profitable business, keeping your eyes on your expenses is key. As you start making money, it’s easy to loose track of your expenses and not worry as much as you did when you were first starting out. It’s a good rule of thumb to review your income statement each month (or quarterly, at a minimum) to ensure you know where your money is going. The expenses your business incurs should be geared towards making money.

Lowering expenses can be a good thing, if you’re cutting out non-value added extras. Can you save money on office supplies, what about shopping around for phone service & long distance pricing, etc. There are always ways to save costs.

On the flip side, cutting costs can be detrimental to your business. I know, you think I’m crazy. Right? Think about it for a minute… Your business is successful because you offer a product or service that others value and want to purchase. Your customers have come to expect a certain standard from you and expect your product and/or service to meet or exceed this standard. Sadly, cutting costs can have a negative affect on your customers.

Let’s look at two examples.

• Let’s say you operate a vacation rental business, where you rent furnished vacation homes on a weekly basis. You would like to boost profits, so you decide to cut costs. The first cost you look at is your cleaning and maid service. This is a major expense to your business. On paper it looks like a better idea to hire a less expensive cleaning service. This results in your rental homes no longer being in pristine move-in condition, creating negative goodwill with your customers. The scary part is that it takes a year or more for your business to see the negative affect poor cleaning has on your business. A year or two down the road, you realize you have fewer repeat customers and are not able to keep your vacation homes rented. The main reason is that the quality of product you offer suffered because lowering your expenses looked good on paper.

• Let’s say you own a web design business and are looking for ways to save money. After looking at your income statement, you realize that wages and salaries is your biggest expense. So you decide to let go of a few employees to lower your costs. At first, your employees understand and are happy to work a little harder to cover the extra work load. However, after several months your employees start to get burnt out. They want to spend time with their friends & family and are getting frustrated putting in overtime hours and working on the weekends. The scary part about cutting labor costs is that the effect does not happen immediately. Your over worked employees have resulted in a higher employee turnover rate (which actually is costing you more in recruiting & new-hire training). The longer hours has also resulted in the loss of creative employees and a loss of productivity. Although lowering labor costs looked good on paper, it had an ill effect on your business’ ability to generate more income.

In closing, keeping a good eye on your expenses is a good thing. As businesses become established, it’s easy to overlook some expenses that are not geared towards bringing in sales and revenues. Keep in mind, when looking at your expenses and brainstorming ways to save money, remember to consider the long-term affect of your cost cutting actions. How will lowering these expenses affect my product and/or service? It’s a good idea to track and measure your cost saving strategies to ensure they are not negatively impacting your business over time. Remember, what looks good on paper can sometimes have a negative impact on your sales and income.

What is the Break Even Point?

The break even point (BEP) is the point when your revenues are equal to your costs. When this point is reached, there are no gains or losses, you break even. Keep in mind, this point is reached during the normal course of business – your company has sold some products/services and your business has incurred some expenses.

Revenues = Total Costs => Break Even Point

Why is the Break Even Point Important?

I know what you’re thinking – boring, boring, boring. Stay with me, I’m getting to the fun part. Your break even point is the magical number of units you need to sell in order to start making a profit. When your business is profitable, that means more money in your pocket!

Let’s say your business sells bicycles. You figure out your break even point is 250 bicycles. If you sell less than 250 bikes in the month, your business will operate in the red and you will loose money. This is because you did not sell enough bikes to cover your costs. However, if you sell more than 250 bikes in the month, your business will make a profit. Meaning you have sold enough bikes to cover your costs and have extra money left over! If you sell exactly 250 bikes, you will break even – you will not have a loss or a profit. You will exactly cover your costs for the month.

How is the Break Even Point Calculated?

Whether or not you’re good with numbers or like numbers, it is important to learn how to calculate your break even point. Don’t worry, I’ll try to take it easy on you.

From the formula above, you can see that you need to know 3 things in order to figure out your break even point (in terms of units).

1. Fixed Costs – costs that don’t change based on your level of sales (overhead costs – rent, phone, internet, owner compensation, depreciation of assets, property taxes, etc).

2. Variable Costs – costs that change based on your level of sales (cost of goods sold (COGS) – sales commissions, wholesale cost of the product, costs to produce your product, factory labor, etc).

3. Price - price you sell your product for. This is typically figured out by looking at the wholesale cost plus your markup, or the cost of manufacturing your product plus your markup.

Now the fun part! Let’s play with the numbers and see how this works!

Bicycle Shop has figured out the following amounts:
Fixed Costs = $10,000
Variable Costs = $110/bike
Price = $150/bike

So…

Fixed Costs / (Price – Variable Costs) = Break Even Point (in units)

$10,000 / ($150 – $110) = Break Even Point

$10,000 / $40 = Break Even Point

Break Even Point = 250 Bikes

The bicycle shop needs to sell 250 bikes each month to break even. This will cover their costs, but the bicycle shop will not make a profit.

Fun Fact – the denominator of the equation (Price – Variable Costs) is called the Contribution Margin. The Contribution Margin is the portion of each sale that contributes to Fixed Costs.

How Does This Apply to My Business?

What if your sales change? The economy goes into a recession, new competition enters the market place, the demand for your product changes, etc. All these changes can cause your sales to drop. If this happens, you won’t be able to sell enough of your product to cover your costs. When you don’t cover your costs, your business operates at a loss.

What if your costs change? Maybe you move to a different office or store front, and as a result you face an increase in rent. Maybe your supplier or wholesaler raises their prices. Maybe business is getting busier, so you decide to hire more employees. All of these changes to your business will increase your costs. A change in costs will affect your break even point. Can your business sell enough of your product or service to cover these new costs and generate a profit?

Let’s look at the bicycle shop example above and take it a step further. We figured out the bicycle shop needs to sell 250 bikes to break even. The problem is, the bike shop owners don’t think they can sell 250 bikes in a month. Now the business owner knows they need to make some changes to avoid loosing money. What changes can the bicycle shop owners make in order to break even?

1. Price –
Increase the sales price for the bikes. If they are able to increase the price of their bikes, they can get away with selling fewer bikes to cover their costs.

What if they raise their prices to $175/bike. Their new break even point would be:
$10,000 / ($175 – $110) = Break Even Point

$10,000 / $65 = Break Even Point

Break Even Point = 154 Bikes

Now, the bicycle shop would need to sell 154 bikes each month to break even. Problem is, raising prices is not always an option.

2. Fixed Costs –
By reducing their fixed costs, the bicycle shop will have a lower break even point.

What if the bike shop owners negotiate a $1,000 discount on their monthly rent. Their new break even point would be:
$10,000 – $1,000 / ($150 – $110) = Break Even Point

$9,000 / $40 = Break Even Point

Break Even Point = 225 Bikes

Now, the bicycle shop would need to sell 225 bikes each month to break even.

3. Variable Costs –
Reducing their variable costs is another way the bike shop owners can lower their break even point.
What if they found a new supplier that sells wholesale bikes for $10 less than their original supplier. Their new break even point would be:
$10,000 / ($150 – $110 – 10) = Break Even Point

$10,000 / $150 – $100 = Break Even Point

$10,000 / $50 = Break Even Point

Break Even Point = 200 Bikes

Now, the bicycle shop only needs to sell 200 bikes each month to break even.

As a small business owner, you can see that any decision you make about pricing your product/service, the costs your business incurs, and the resulting volume that you sell are all interrelated. Knowing how many units you need to sell in order to break even allows you to set up meaningful sales goals. Sometimes making the transition from the red to the green is as simple as changing your price or costs. By performing a break even analysis, you can effectively and smartly make changes to your business to help you cover your costs. When you operate a profitable business, the result is more money in your pocket! Cool stuff and very important in running a successful business!