How to Run a Business on a Thin Profit Margin
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Businesses that operate on a thin profit margin often find themselves in a constant struggle to maintain profits. One mistake, a drop in customers, or an uptick in costs can cause positive cash flow to nosedive into negative territory. From a steady flow of customers to predictable expenses, consistency is the name of the game when managing a business with slim profit margins.
Businesses that run on thin profit margins depend on retaining and building their customer base. A negative fluctuation in customers can cause profits to plunge and turn into losses. Maintain a focus on keeping customers happy so they return regularly. A solid reputation attracts new customers. Instruct employees to engage customers in a friendly manner and to do whatever they can to make a customer's experience a positive one. Managers must swiftly remedy any problems that arise, even if it means apologizing for a mistake an employee never made. It's always better to make a customer happy than make their bad experience even worse by continuing a dispute. Polaris Marketing Research suggests surveying customers about their experience and rewarding them with discounts, coupons, or freebies for their continued loyalty. Remember to contact upper management for approval before implementing any new loyalty programs. (Ref. 1, p. 2, #1 & #2)
Stock too much inventory and you could wreck your profits. When managing your inventory, be sure to take your order lead time into consideration. Lead time represents the length of time it takes for you to make a product available for purchase once you place an order with the supplier. In general, there's no reason to stock much more than what you can sell within the lead time. For instance, suppose you manage a pet store. On average, you sell 10 dog beds a week, and you have a lead time of two weeks for those beds. Stock anymore than 25 of those beds and they're going to sit on the shelves or in the back room, and you won't see profits from your investment for weeks or months to come. The extra five beds serve as safety stock, in case demand increases before your new stock arrives. The problem of overstocking significantly worsens with perishable goods. You not only negatively affect cash flow, you risk losing part of the business's investment if the goods expire before they sell. (Ref. 2)
Expenses are the enemy of all businesses, but they're the arch enemy of those that operate on a slim profit margin. As a manager, there's not much you can do about certain expenses, such as building rent and utilities. But you can control other expenses that eat into your cash flow. Prime examples include labor, office supplies, fuel, construction supplies and food costs. Each industry has different expenses. For instance, restaurants often operate on slim profits. Managing one successfully requires you to schedule only the necessary amount of employees to keep the restaurant running effectively and send employees home if business drops. You need to also educate employees, particularly those cooking the food, to follow recipes and not add an excessive amount of ingredients, which can balloon food costs and shrink profits.
Maximize your business's profit by instructing employees to up-sell. Up-selling involves increasing the cost of a customer's purchase. It's typically achieved by adding something to what the customer originally wants to purchase. Warranties, packages, accessories, and food combinations in a restaurant serve as a few examples. For instance, if a customer purchases a computer, the business tries to up-sell by offering virus protection for an additional cost. The deal is enticing because that protection is cheaper than if the customer would purchase it separately. The business brings in less profit than if it would sell both the virus protection and computer individually, but by offering them together, it brings in an immediate and guaranteed profit that improves cash flow. Your employees are responsible for up-selling, so you need to instruct them to do so constantly and explain the importance of doing so. (Ref. 3)
Located in Pittsburgh, Chris Miksen has been writing instructional articles on a wide range of topics for online publications since 2007. He currently owns and operates a vending business. Miksen has written a variety of technical and business articles throughout his writing career. He studied journalism at the Community College of Allegheny County.