Here are the last two ways to increase profitability:
#24 – Are you growing too fast?
The rule of thumb for growth is annualized sales divided by working capital should be 10 or less.
Working capital is current assets minus current liabilities (found on your balance sheet). These two numbers must be accurate to get an accurate number!
Annualized sales is either your year-end sales or if you are in the middle of your fiscal year, then your year to date sales times 12 divided by the month of the fiscal year. For example, if your year ends on December 31st, and you want to calculate this ratio in May, then take year to date sales through May, multiply the result by 12 and divide by 5.
If your result is higher than 10 you must make sure your prices are profitable and watch cash closely so that you don’t grow yourself out of business.
#25 – Watch your receivables
What do receivables have to do with profitability? If you don’t collect your receivables then they turn into bad debt – which is an expense on your profit and loss statement. This expense lowers profits.
It is important to have a good collection policy – and collect COD whenever possible. Even in small towns, you can’t go into a grocery store and bill.
Before you start a commercial job, call the person who is responsible for accounts payable at your customer’s business. Introduce yourself and find out exactly what that person needs to pay you on time. This also helps if there is a problem later – you know who to talk with.
If an invoice is due in 30 days, then you should receive payment in 30 days. On the 31st day, someone must make a telephone call to discover when payment will be made. This is a friendly phone call. It sends a message to your customer that you are serious about getting your money.
When you get your weekly cash flow report, there should be an aged receivables and aged payables list attached to it. This is one easy way to keep your eye on past due accounts.
Final thoughts for you:
This series has given you 25 ways to increase your profitability. You don’t have to do all at once – choose a few and get started. You should see increases in your bottom line.
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Books/Audios that could help your business and you.
Casey Brown makes an interesting case for whether you should raise prices and how to raise prices if you decide to do so. She has implemented what she suggests in the book and gives you stories from companies she has helped change their pricing strategy.
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