Hold on to your profits, we could be in for a rough ride

By Michael Derin 2010

As someone who works with small and medium sized businesses I frequently get asked, “How are SMEs faring?” At the moment my answer would be they are operating amid a great deal of uncertainty. However, despite this many small businesses are focused on growth.

A minority government, a two-speed economy, inevitable interest rate rises, lack of small business lending from the big banks and fears that the USA could be heading for a second recession all make for a business environment that is hard to predict and difficult to plan for. Many small businesses aren’t sure how fast and how much growth the business can support.

In the current environment growth is certainly possible but going for BIG growth without capital behind the business could easily backfire on you if the economy goes south again. My advice is to concentrate on mitigating risk and look at retaining profits so that if growth is part of your business strategy this can be funded adequately without the business overextending itself.

Retaining profits is easy for me to say, but not always easy for a business to do and the reality is, not many small businesses fully appreciate the importance or understand how to go about this.

Top four ways to keep profits in your business are:

1.     Concentrate on retaining existing clients and a consistent level of sales.  This is your opportunity to ensure you have a certain level of income coming into the business that covers all your monthly expenditure and makes room for growth

2.     Price your product or service competitively without underselling your value or service

3.     Review your supplier contracts and reduce costs where possible meaning further capital is retained in your business rather than being spent unnecessarily

4.     Adopt good financial management and discipline – and as a minimum every business should be reviewing a monthly profit and loss statement.

When looking to retain profits within the business, your number one tool is your profit and loss statement as it helps you to evaluate your business’ performance. Too many small businesses don’t utilise this invaluable report and without it is like flying blindfolded. Not only that but with the current economic environment banks and investors are looking very closely at profit and loss statements in order to get a clear understanding of the business’ profits, expenses and its overall performance.

Now is the time to ensure you have your business basics covered off and have a clear picture about where your business is positioned and how you can make it perform. The best business decisions are those made when you are truly informed on the financial aspects of your business.