Everyone who starts a new business knows they need to make it profitable. No new business can run forever on savings, investor capital and loans, so it is vital that every new business owner has a workable plan and a timetable for becoming profitable. Simply put, business profits occur when business income is greater than business expenses.
Below are 10 keys for making your startup profitable as quickly as possible.
Ways to generate income
Devote 80 percent of your time to marketing and sales. After your new business is organized and you are clear about what products and/or services you will offer, getting your marketing program going is the most important thing you can do to increase income. For the first two years of a new business, 80 percent of the owners’ time should be spent working on the implementation of a marketing plan, including creation of a customer list and making sales presentations to potential customers.
Ask for referrals. When you start a new business, the best, least expensive and fastest source of sales is asking for referrals from your personal contacts. Everyone you know will know someone that could use what you are selling. If you send everyone you know an email with a “sell sheet” describing your products and/or services, you are able to create a sales force that costs you nothing.
Follow up on every sale. Your customers can either be your best asset or your worst liability. In the early stages of a business, it is essential you have feedback about your products and/or services, your pricing, your customer service and the overall image of your business. The best way to get this feedback is through a follow-up call, email or survey request sent to every customer soon after they make a purchase. Use this information to make vital adjustments to key elements of your business.
Collect your accounts receivable quicker. Your customers will often delay payment of the invoices you send them as long as possible, but how quickly a new business collects its accounts receivable can make the difference between success and failure. You can download a simple plan for the effective collection of your accounts receivable here.
Add value to everything you sell. Profitable companies add value to everything they sell. This added value can take the form of a unique product feature, a greater financial value or enhanced customer service. By evaluating every transaction from the customer’s point of view, all businesses can find several ways to increase sales and profits by using added value to create customer loyalty.
Related: 6 Ways to Fund a Startup Business
Ways to decrease expenses
Use an accounting system to track cash flow, income and expense. A failure to track and properly manage expenses will kill an otherwise potentially successful businesses. One of the first things every small business should do is purchase and use an off-the-shelf accounting system to track income, expense and cash flow. This simple tool allows owners to identify and compare expenses in all key business areas, to assure money isn’t being wasted.
Aggressively negotiate fixed expense contracts. Often, arrangements for business goods and services can be set up on a fixed price basis. For example, fixed price part agreements, salesperson expense agreements, independent contractor agreements and raw materials agreements can all help to reduce expense fluctuations. Care needs to be taken to assure a fixed price contract is not be used in a situation where the expenses involved may significantly decrease during the contract period.
Lease or rent, don’t buy. In many situations involving significant expenses such as large equipment purchases, it may be financially more prudent to lease or rent rather than putting out a large amount to buy an expensive item. Important tax considerations such as a depreciation allowance can factor into this decision, so check with your tax preparer.
Partners should do as much work as possible. During the first five years of any business, the founders and main partners should be as involved as possible with the day-to-day activities of the company. Partners are generally more knowledgeable about what needs to be done and because they have a vested interest in success, they will be more committed to achieving that success.
Don’t give up your day job. It usually takes a new business at least two years to achieve a self-sustaining level of profitability. To whatever extent possible, if partners can keep existing sources of income in place, the significant reduction of expense can play a major role in getting a new business to profitability. The real trick with this is for partners to know when they can devote their full time to the business, even if that means taking a reduction in their personal income.
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Conclusion
The number one goal of all startups should be achieving profitability. Following the simple tips outlined above will keep expenses at a minimum and generate the greatest amount of income possible. Entrepreneurs who have started a business before know it can take 24 months for a new business to become profitable, so they also know that it may be necessary to obtain outside funding.
