Three ways to boost profitability

November 22, 2011

U.S. consumer confidence improved in early November from last month. But with the failure of Congress’s supercommittee to reach an agreement on the deficit and unemployment still around 9 percent, consumers — who generate 70 percent of all economic activity — may remain uncertain about the future.

If sales volumes aren’t improving or are volatile, business owners can still grow profits. It’s all about boosting profitability, which is something privately held businesses have been doing since 2009, according to data from Sageworks Inc., a financial information company. Pretax net margins for privately held companies in the U.S. as a whole have been nearly 7 percent this year, compared with about 5 percent last year and 4 percent in 2009, according to Sageworks data.

Here are three ways to generate more bang for the bucks your business brings in:

●Revisit suppliers. Loyalty often plays a role when choosing suppliers, says Michael McNeilly, Sageworks director of advisory services. But there are probably alternative vendors eager to earn your business, so ask current and prospective suppliers about discounts they can offer, he says.

Be sure to ask about future pricing, too, McNeilly says, as you don’t necessarily want to switch suppliers for a one-time discount. “Often using more than one supplier creates a competitive situation that allows you to continuously get more advantageous pricing,” he says.

●Request quicker delivery. Some businesses believe keeping a larger inventory provides a better presentation to customers or paves the way for bulk purchasing discounts, says McNeilly.

“But a lot of time, that inventory simply takes up space and ties up cash,” he says. You can often keep a smaller inventory by utilizing same-day or next-day delivery on additional orders. “Pressing suppliers to deliver inventory quickly allows you to utilize the supplier for warehousing,” he says. That can free up space to offer customers a wider selection of products and free up a significant amount of cash flow while still meeting customer needs.

●Review returns on advertising. “It’s easy to spend way too little on advertising, but it’s also easy to spend way too much,” says Nathan Myers, Sageworks director of consulting services.

“The only way you know if your money is being used effectively is to track the results of your marketing.” Go to the source to find what works. Ask customers why they came on board, what got their attention and where they heard of you. “A quality conversation yields the best information, but they can be few and far between,” Myers says.

Mix it up and creatively poll customers using different methods. But be sure you approach all inquiries with consistency, he advises. Ask so that the answers you get ultimately lead you to your goal — answering the question, “Where should I spend my advertising dollars?”

Mary Ellen Biery is a financial writer at Sageworks Inc.

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