When running a business – especially something like , you number one priority will always be profit. Profit will be the bread and butter of your company and if you do not maintain and check with it constantly, it will be the thing that will bring your business down sooner or later.
Your profit and loss sheet will be available to you at the end of the year and it will show you all the decisions you’ve made during the year. These decisions might have given you more money or might have also caused you some money. At the end of the day, the sheet is your indicator in which will show you how your company is doing in terms of cash flow and the financial health of your company.
So, imagine you’re a consulting firm or an agency, there are a few mistakes that we’ve noticed that will start killing your profit margins if you don’t be careful about how you set up your finances.
Mistake 1 : You Might Be Underestimating Projects
As an agency, you might be taking up a lot of projects that come your way. This is always great because it means that you have a steady and strong flow of leads and business. However, there is a downside to this. Especially if you do tend to underestimate your project. When you’re first starting out, you will obviously want to take in every job and project that comes your way because you’re excited and the money is good.
But if you underestimate the amount of work that is going to be needed for the project, you will then severely under-quote the amount of money that your client will give you. The more you do this, the more you kill your profit margins. Make sure you have a set amount of wages for the basic things that you do. And these prices cannot be negotiated, at least this way you have a basic line of income whenever a certain project comes up.
When you have a baseline, it will be a lot easier for you to quote your clients and you will also be a lot more consistent. Being consistent means that you will also have a better reputation for yourself. Clients will be able to trust you and look at you as someone that is trustworthy. When you have a baseline, you know how much you need to make to ensure that your profit margins are met.
Mistake 2 : Not Checking For Increasing Costs
When you expand and when you’re company is getting more hires, your costs will definitely increase. If you do not use this and compare it to your profit margins, your margins will consistently diminish. When this happens, you will lose all the money that you will make. As a responsible business owner, you need to make sure that either you or your finance team is constantly looking into the fact that your outflow of cash is increasing and that it should be tallied against your inflow.
A good company accountant can do this for you if you are not qualified or used to it.
Those 2 are the biggest mistakes and reasons we feel why your profit margins might be diminishing or decreasing.
However, there are a few things that you can work on to make sure that your profit margins are saved and kept at a healthy rate most of the time.
Here are some of the things you can work on to ensure profit margins stay healthy :
- Lower the cost of vendors and suppliers – You would need to do this often and always look out for the best prices in the market. Do not stay complacent and just stick with the same people all the time.
- Increase prices – This one is something you need to be careful with. Do not just adjust your prices to compete with competition but always try to be better than them.
If you need an accountant to help you with these calculations, you should ensure that they are MBRS certified!