How small businesses can analyze and improve their profit margins

Editorial Team

Woman using calculator on phone

Running a successful business is all about profit margins. As the cost of doing business fluctuates, so does your bottom line.

Keeping your business going means constantly monitoring and improving your returns. Check out five questions and answers to help your business on its way to increased profit margins.

1. What are profit margins and why do they matter?
2. How are profit margins changing?
3. What can businesses do to improve profit margins?
4. When is a low profit margin still worth it?
5. How can my business respond to inflation and rising costs?

1. What are profit margins and why do they matter?

A profit margin is simply how much money you make on a particular item or service versus what it costs you to produce. Calculating profit margins is an essential to bringing in more money than you spend–and determining how to run your business.

Some costs may seem obvious, like the amount of flour and sugar in a cupcake. Other costs, like refrigeration or labor, may be less simple to quantify per item, but still need to be factored into how much profit you ultimately reap.

(Are you a restaurant owner? This post Understanding restaurant profit margins and their importance is worth a read.)

2. How are profit margins changing?

It’s no news that the costs of doing business are up. Supply chain disruptions continue to be a persistent problem, so raw materials are still more expensive to obtain. Gas prices are up, so shipping is more costly, too. And labor costs are higher as well.

The inflation rate is also higher than it’s been in decades, which means price tags are hiked up even more than they already would be.

All that means profit margins are getting squeezed, and businesses make less on items that now cost more to produce.

3. What can businesses do to improve profit margins?

Determine which products and services deliver the highest profit margins for your business. Clover Reporting tracks sales by item, so you can see which items are your most popular. Sales reports also track item costs, so you can identify your profit margins. Figure out which items are both popular and bring in higher profits than other products, and ideate how you might be able to promote those products more to boost sales. Also, watch for items that aren’t worth their investment, whether because they don’t sell or cost more to make than they’re worth.

READ: 16 ways to boost profitability on your top-selling product

Explore different methods increasing your top-line revenue and maximize your cash flow. That could include expanding how your business brings in revenue. One option could be to implement a recurring revenue model, such as offering a subscription version of your business or memberships.

Streamlining your operating expenses can make room for increased profit margins. Determine where you can strategically cut costs in your budget. Streamlining those expenses can look like: automating manual processes, reducing unnecessary staffing, capitalizing on peak hours of operation, and eliminating services or subscriptions from your budget that aren’t frequently used.

READ: 5 creative ways to save your business money AND Work a little less with 11 popular Clover apps

Invest in customer retention strategies. Maintaining a loyal customer base can make way for consistent revenue over time. Evaluate your current methods of incentivizing customers to visit your business and implement new ways to keep your existing customers coming back for more. Clover Customer Engagement Suite offers a powerful toolkit to build your customer list, develop profitable and lasting relationships with them, reward loyal customers, send timely promotions to drive sales, and more. Customer Engagement Suite is pre-installed in your Clover Dashboard with great functionality available for free – what’s not to like about that?

4. When is a low profit margin still worth it?

If you offer a popular item with low profit margins, the volume of sales may add up to be worth the cost. Or, you may consider that a particular low-profit item tends to generate loyalty or sales of related items with higher margins.

5. How can my business respond to inflation and rising costs?

Although businesses are getting pinched, there are strategies you can use to keep your profit margins where you need them.

Switch to lower-cost suppliers. Look for goods at lower prices, particularly for supplies you may not have thought to reevaluate before. You’ll want to be careful to maintain the quality customers expect, but, with some research and scouting around, you may find suppliers that help you shift to lower your costs. READ: How to buy wholesale for your small business
Consolidate purchases with one supplier for a discount. Vendors may offer discounts for ordering in bulk, for ordering more goods, or simply for being a long-term customer, and that may save you money. Vendors may also be open to negotiating prices to keep your business.
Raise prices. Many businesses have already chosen to pass rising costs on to consumers, a sometimes necessary balance of scales. Raise your prices without losing customers by creating new products or bundling existing products in new ways, paying close attention to quality and service, preparing staff to answer questions, and studying your competitors.

Clover Rapid Deposit is helping merchants everyday manage cash flow better–learn how it could help your business. And, be sure to take a look at more ideas about how you can recession proof your business.