We all could benefit from a little bit more sanity these days, but what about your business? You may have heard the old saying that “turnover is vanity and profit is sanity,” so let’s start reaping the rewards of your hard work rather than continue to spin your wheels. Here is the first of a two-part series providing key tips for improving your profits.
All in the Treatment
Timing is everything, especially in terms of income and cost recognition, commonly referred to as the accounting treatment. It comes down to how you keep your books. For example, when you account for the revenue from a sale, do you account from the moment you sell and produce an invoice or when you provide the actual service? And when you look at costs, are you recognizing when you generate the sale or when you deliver the service? Because when you play around with those accounting treatments, you can make a big impact on your profitability.
Therefore, it’s important, when looking to invest, to first understand what accounting policy the company is currently using. Specifically, you want to look at what their income recognition and cost recognition policies are because there is often an advantage to doing it one way over the other. It’s all in how you treat the numbers.
It’s also important to communicate with the organization’s accountant because they’re more focused on saving money through reduced taxes. Less profitability on the books means fewer tax bills for the company. It has to be a collaboration to find a winning strategy.
Capitalize on Capitalization
If you’re trying to save on tax dollars, you’ll want to report an investment in a good or service as an expense. However, while this keeps the tax liability low, it also lowers your reported profitability. The best solution is noting the investment as an asset so that it doesn’t influence your profit margin either way. This is referred to as using the Cost Method.
If your investment ends up surpassing your earnings, that’s even better news. That’s considered a return of investment and the cost of the investment on the books is reduced. Plus, if you have salaries associated with that business venture, you can capitalize on those by adding the funds back into the profit of your company.
Finally, if the asset is later sold, the gain or loss is adjusted for in net income and affects only investing cash flow. After all, it’s about capitalizing on the opportunity.
Price Increases
When purchasing a company, it’s important to evaluate the price at which the current owner is charging for their products or services. I’ve found that the price tends to be related to the age of the owner. Generally speaking, as people age, they don’t keep up with the rate of inflation. As a result, it might be a good idea to re-evaluate the pricing structure and raise prices. Even a slight increase can greatly benefit the bottom line. In fact, a 5% increase in price equals roughly a 40% increase in profit. This can have a dramatic impact on the overall value of the business.
While some worry about alienating customers with even a modest price hike, not raising prices accordingly can be equally dangerous. The numbers show establishing a more accurate price increases profitability faster than expanding volume. Managing the transaction price is imperative. Otherwise, you’re simply leaving money on the table.
Outsourcing
For a while, outsourcing was often considered a dirty word. But, with remote and gig work at an all-time high, outsourcing options and perceptions have greatly improved. At some companies, you’ll find have an odd-sized requirement for a staff position like half a bookkeeper or 75% of a marketing person. These are the types of jobs that you could consider finding an external marketing person. These are the functions that an outside provider or freelancer could perform. Plus, an external perspective can be as beneficial as a fresh pair of eyes.
Now is the time to regain the sanity and thus the profitability of your business. The health and wellness of your business rely heavily on profit margin. Leveraging banking processes to get the most out of your investments and expenditures is not only good for the bottom line but also for healthy growth.
For a few more key tips for improving your profits make sure to check out Part 2 of this series next week.
And, if you want to learn how to buy businesses without using cash up front, download my free special report. I also invite you to consider joining the Harbour Club and attending one of our virtual events where you’ll not only learn more about how to do all that I’ve discussed but also meet and work with other members who have successfully applied these strategies and techniques. I look forward to having you as part of our community.
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