A Simple Strategy For Turning Costs Into Profit

That old saying, it takes money to make money persists because it’s true.

For business owners, cost centers have long been a necessary evil that comes with the territory.

Expenses run the gamut from rent and inventory to web hosting fees, marketing automation tools, employee benefits, and maintenance costs.

While you can’t get away from expenses altogether, digging into your monthly financials can help you identify opportunities to bolster your bottom line.

In this article, I’ll go over some ways you can use your accounting data to identify untapped sales opportunities, cut waste, and even turn some cost centers into revenue drivers.

Dig into Monthly Financials to Identify Your Biggest Expenses

When you want to know how your business is performing, it’s tempting to pass judgment based on the number of sales or gross revenue. However, if you want to find opportunities to turn costs into profits, you’ll need to take a deeper dive.

Now, you should be keeping a close eye on your profit and loss statement (P&L), as is.

Your monthly financials offer more insights than you might imagine, allowing you to identify gaps in your savings and expenses, and flag potential issues before they put your bottom line at risk.

Core areas to review include:

Revenue

Revenue is the money that you bring in from selling products or services after expenses. Of course, total revenue should exceed expenses. Otherwise, you’re in trouble.

Is revenue predictable? Recurring? Or, are you chasing down a lot of one-off projects or purchases?

What are your sources of income? Do you have multiple revenue streams, or is one product or service pulling all of the weight?

You’ll also want to consider whether any of your revenue streams are taking up too much time or require too many resources.

Net Profit

Net profit is the money that’s left after you’ve paid for all of your expenses. You can check your net profit by using the following formula: revenue – expenses = profit.

Profit per Client

Some clients are more profitable than others. Sometimes clients seem profitable as they’re paying big fees or buying expensive products, but they’re also causing you to spend more on expenses.

Or maybe they’re asking for a lot of revisions or calling you multiple times a day.

Calculate how much you’re making per client by using the following formulas:

Total amount paid by client – total expenses = Gross profit per project

Gross profit generated per project/ hours invested per project = Hourly wage

Break down the hourly wage earned per project, then focus on those clients that provide a higher hourly wage.

Knowing these numbers will help you decide whether you need to raise your prices. It’s also an excellent way to find out which customers you should be targeting in your ad campaigns.

Customer Acquisition Cost

Customer acquisition cost is how much you spend to get a new customer. This includes everything from marketing costs to paying employees to create marketing materials.

Look at how much you’re spending on new business by product/service. Do some products require more resources than others?

For example, you might have a product that doesn’t cost a whole lot to make but isn’t profitable because you need to work hard to get someone to buy it.

This problem is common in niche areas where it’s hard to reach your target market, or you face challenges in communicating the value of a solution few people understand.

Additionally, you’ll want to look at customer churn. Once you get customers, can you keep them?

By some estimates, it now costs about 16x more to attract a new customer than keep an old one. A low churn rate can make up for high-acquisition costs since you’re paying for steady repeat business.

Accounts Receivable

Look at your accounts receivable turnover. How many accounts are past due?

You’ll want to make sure that you keep on top of this number and follow up on unpaid invoices to make sure you get your money.

Some business owners feel bad about asking for payment at the expense of their profitability. Aside from the reality check that comes when faced with a long list of outstanding, aging receivables, slow turnover could signal customer instability.

Return on Assets

Your ROA is a ratio that represents what percentage of profit that a company makes compared to its assets. Assets include anything of value from accounts receivable (money owed by clients) to inventory, property, and equipment.

You can calculate your ROA by using the following formula:

Net Income / Total Value of Assets = ROA

A higher percentage is better here, as it shows that you’re managing your assets well. Howerver, it’s worth noting that a digital agency or professional services firm is likely to have fewer assets than, say, a car dealership or a manufacturing company.

Should You Hire Someone?

Employees, of course, are a significant expense. But it might be worth it to hire someone that can help you comb through your financials to find opportunities and put them into action.

However, depending on how complex your business is, hiring an employee to help you audit your finances for opportunities might be a smart idea, allowing you to focus your efforts on other areas.

Deal with Your Waste Centers

Automating specific tasks in your business allows you to reduce the time, manpower, and operating expenses required to run your business.

Consider the routine tasks that could be eliminated or reduced to save money by asking yourself the following questions:

  • Are you still using paper record-keeping methods?
  • Are there tasks that take up a large share of time?
  • Do you often have to re-enter data or repeat steps more than once?
  • How efficient are existing employees?
  • Are employees working overtime?
  • How many leads are you getting on average?
  • How long does it take you, on average, to close a deal?

Where Can You Increase Sales?

In this case, finding ways to increase sales doesn’t necessarily mean developing a new product from scratch.

Instead, it’s more about taking advantage of the opportunities you’re leaving on the table by, say, failing to ask for referrals or repackaging existing services to reach a different market or drive recurring revenue.

Cross-sells, Upsells, and Add-Ons

Is there an opportunity to cross-sell or upsell your customers with products or services that complement your existing offerings?

For example, if you run a digital marketing agency, you might make a policy of asking incoming clients to sign up for a complimentary service.

Say you’re already writing blog posts. In that case, you might also offer add-on services like repurposing those posts into social media posts, videos, or a content amplification strategy.

Package Services as Products

If your business primarily revolves around selling services, consider repackaging your offerings as a product. There are a couple of ways you might approach this.

The first is packaging your services by the project. So, you might advertise a package of blog posts or an SEO audit as a one-off charge.

The benefit here is that this might win over new clients reluctant to commit to ongoing projects. It also presents something abstract, like business services, as a tangible package, breaking down exactly what they can expect to receive.

Another approach is to look toward adopting a relationship-based sales model designed to attract clients by offering monthly or yearly plans. Or, offer a prepaid bundle of classes or visits at a bulk discount.

Now, you’ll need to make sure that your team offers top-notch service throughout this entire arrangement so that customers re-up their plan next time around.

And, finally, you might try changing the format of your offering into a sellable digital asset. This might mean selling a customized report and roadmap for developing an SEO strategy, a series of online courses, or a paid subscription to exclusive content.

Shift the Focus to Retention

New business is always a good thing, but it’s important to understand that it shouldn’t be your core focus. Profit potential could be right under your nose, and working to improve your customers’ experience may net you more profits than chasing new leads.

Some ways you might improve retention rates:

  • Offer self-serve options. American Express found that over 60% of US customers say their preferred channel for answering questions is a self-serve mobile app, chat, or website.
  • Focus on convenience. Forrester reports that 66% of US customers shop more with retailers that value their time. Is your process convenient or do you make customers jump through unnecessary hoops?
  • Listen to feedback. Social listening, surveys, reviews?insights are everywhere. Listen to what people are saying and make changes that align with customer needs.

Look for Opportunities to Turn Expenses into Revenue

Beyond looking at what businesses can do to offset the costs of non-revenue generating activities, what can you do to turn losses into actual profit? This is the tricky part.

Some experts say that a cost center is just that–and as such, you won’t have much luck turning expenses into revenue. That said, it’s a matter of thinking creatively.

Here are a few ideas for recouping some of those losses:

  • Do you have extra space you can rent out to another company? This might mean renting out storage space or allowing remote workers to rent office space in your building.
  • Do you have equipment that other brands can use? If you’re a manufacturing company, consider offering the use of your equipment during off-hours. While wear and tear is another cost to consider, you might want to look into renting machinery to
  • Are you spending a lot on SaaS products/analytics tools? If you’re in marketing, sales, or business services, you’re likely spending a lot on expenses related to things like email marketing, paid ads, or business intelligence tools. Consider offering white label services or custom reports to clients and other businesses alike.

Build a Strategy

The tips I’ve outlined above cover several different categories: productivity, boosting the value of current customers, turning expenses into revenue, and so on.

Whichever opportunities you choose to pursue, you’ll need to be strategic about making that next move.

Here’s what you’ll want to include in your master plan:

  • Identify opportunities–Make a list of the potential revenue streams uncovered in your financials.
  • Establish a goal–What do you want to achieve? Are you hoping to expand your offerings, reach new markets, or offset expenses? It’s perfectly fine if you’d like to do all of these things, but keep in mind, you’re better off focusing on one idea at a time.
  • Legitimize your ideas–Research and validate your assumptions before investing resources into marketing, development, or additional manpower. If you’re looking to improve your cross-selling numbers, you’ll need to spend time looking at which products/services people frequently buy together, as well as conduct in-depth research on your personas.
  • Develop your roadmap–What will you build, and what resources are required to make it happen? Even if your plan is to rent out space or equipment, you’ll still need to come up with a plan for promoting your idea, be it through public outreach, cold emailing, or a combination.
  • Define how you’ll measure success–Make sure you’re tracking the metrics that represent success. That might mean watching retention rates, customer satisfaction scores, total sales, etc.

Wrapping Up

Improving your bottom line doesn’t necessarily require making drastic changes to your brand, products, or processes. Sometimes, opportunities are right there, waiting inside your routine reports.

Embracing a cross-selling policy, following up on aging receivables, repackaging services–all of these strategies can lead to more money in the bank.

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Author: John Lincoln

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