10 Profitability Killers for Small Businesses

As an owner of a small business, you don’t intend to get in the way of your profit margin, but you may be doing just that without even realizing it.  Business owners naturally strive to do all they can to maximize profits, but without the appropriate tools and necessary accountability measures in place, they may be inadvertently limiting their options for turning a profit. Profitability killers for small businesses get in the way. 

A robust bottom line on a company’s income statement is an indicator that the business is successful. Having a healthy net profit is essential for a business’s continued growth and prosperity.

If your business is like many others, it is probably leaking profits, and, in so doing, weakening your position in the marketplace.

This guide will help you discover critical areas where your company can boost your profit margin by avoiding profit-damaging pitfalls. Chances are that some of these profitability killers are harming your business today.

10 Profitability Killers to Avoid So Your Business Experiences More Profits

 1)     Large, Unexpected Outlays

In too many cases, huge, unforeseen capital outlays completely stymie an organization’s cash flow projections. Unfortunately, many businesses – and maybe yours – do not sufficiently plan for substantial capital expenditures. If you have outdated equipment that is not allowing you to streamline your processes, that should not be recorded as an unexpected expense.

 Evaluate all aspects of your operation and attempt to identify tools or equipment that may need updating or replacement. The more you stay on top of potential capital outlays, the better you can plan for them.

2)     Overdue Invoicing

Although slow customer payments can cause theirshare of problems for your bottom line, you can control how promptly customers are invoiced.. The more diligent you are about billing, the more likely it is that you can anticipate your customers or clients will be paying on schedule.

 3)     Failing to Estimate Your Company’s Cash Flow

More companies than you might believe have poor or non-existent cash flow forecasts. It is critical to the health of your company that you account for unexpected changes in your cash flow needs, especially in an unstable economy.

 Your cash flow estimates should be treated as a living document that can adjust to the changing needs of your business as investments, income, and expenditures fluctuate.

 4)     Misusing Credit

During tough economic times or when your company is struggling to meet budget projections for the month or quarter, it is tempting to rely on unsecured credit like credit cards for sizable and unforeseen expenses.

 The problem lies in not being able to pay off the balance, and then you fall victim to unreasonably high-interest rates. This is a clear example of something you need to avoid doing so you don’t drain your cash flow.

 5)     Poor Time Tracking

The main cost of your business operation is probably labor. Some businesses, however, have not kept up with the times. You may scrupulously track the specific materials cost of each individual order, as you record it alongside revenue received from the eventual sale of your company’s product.

 Labor costs are recorded, as well, but they are not connected to the order with the same meticulousness as materials, and that could be a costly mistake.  In order for your company’s profitability to be protected and measured, the management levels of your organization need to determine which projects are money-makers and identify the ones that are losing money. Labor costs are critical to optimizing revenue, so it’s critical that you understand and keep track of them.

If you want to track accurately and on a regular basis, you must use a flexible approach to time recording. This means how you track your employee’s time needs to be in line with how you do business. 

6)     Overdrafts and Bank Fees

You want to avoid overdrafts if at all possible, as they are usually quite expensive and they can be devastating to your bottom line, especially when they are unanticipated. You may want to consider acquiring overdraft protection if you run up against non-sufficient funds problems on a frequent basis.

 7)     Incorrect Billing of Clients

Invoicing clients can present vulnerabilities when it comes to your profit margin. For example, knowing that your client is obligated to pay the exact dollar amount listed on the invoice, if that amount is not correct, the payment your business receives will also be incorrect. Too many organizations are getting this wrong too often.

 In order to maintain consistency in your invoicing procedures, have robust protocols and sound management in place. Your company should put into practice a policy of accurate timekeeping and recording work for clients that could necessitate an initial capital outlay to cover the cost of equipment and training. This will serve to secure your profits for a long time.

 8)     Unanticipated Tax Bills

There is no doubt about it. Tax bills can seriously inhibit your cash flow.  When the tax liability is more than expected, that can have a real negative impact on your profit margin.

 This is why you need to acquire the services of an outstanding quality tax professional. This investment in your taxeswill absolutely pay off in the form of a higher profit margin. To take it a step further, engage a professional who provides tax planning. This service can save business owners 4,5, or even 6 figures a year depending on the unique business situation. 

 9)     Employee Benefits

Universally for small businesses, employee benefits are a substantial line-item cost. It is worth it for the health of your bottom line to research other options and ensure your employee benefits package is the most fiscally sound available within your industry. In the process of doing this research, be sure to maintain a high level of service for your team members.

 10)  Late Customer Payments

You never want to have your small business be in a position of customers paying you late. One way to prevent this profit-killer from occurring is by cultivating positive and rewarding relationships with your clients.

Make sure you maintain open and honest communication lines with customers so that you are kept up to date on the status of their cash flow.  This approach helps customers communicate more, and you are not left unaware of situations that can damage your bottom line.  Ultimately, your customers need to pay for your products or services promptly.  Establish the financial expectations upfront and make it clear that late payments come with defined penalties

Keep Your Profit Margin Protected from These Profitability Killers

 We understand that building and maintaining a cash flow model can be difficult, particularly during downturns in the economy or when your company is struggling to sell enough products or services. But avoiding these serious mistakes, as well as by having the right fiscal measures in place, you can protect your profit margin and enjoy greater success by increasing your revenue stream.

Drilldown Solution Can Help Your Small Business Optimize Profits

At Drilldown Solution, we are all about helping small businesses to be profitable by avoiding these profitability killers. Our fractional CFOs are highly skilled and able to assist you in establishing a robust financial system while providing you with keen insights, strategic guidance, and fiscal leadership to support your growth and ascendance in the marketplace.

Drilldown Solution offers a full suite of financial services that include bookkeeping, accounting, and tax preparation. We have the expert team to help any small business thrive, even under the current COVID-19 pandemic circumstances. We accomplish this with a three-part system comprised of patient-experience excellence, financial focused operations, and accountability.

 Our goal at Drilldown Solution is to put your small business in the best financial position possible, utilizing proactive processes and personal care!