Small businesses constitute the backbone of British industry. Altogether, small-to-medium enterprises (SMEs) represent more than 99% of the UK’s business population, and somewhere in the region of two thirds of national employment. This is a lot of industry, and a lot of money to boot.
But the outsized influence of small businesses on the industrial makeup of the nation is not representative of the lived reality for many small business owners across that same nation. Running a business is akin to walking a tightrope, and more so now than ever – with especial thanks to the febrile economic landscape of the UK over the past five years. When profits are harder to enshrine than ever, it’s important to re-evaluate exactly what is most likely to impact them, for better or for worse.
Understanding profit margins beyond revenue
First, the basics: what do we mean by profit margins? Fundamentally, profit margins are percentages. They represent the percentage of incoming money that remains as profit, after expenses; this percentage is calculated as revenue, minus costs, divided by revenue and multiplied by 100.
This simple equation lays bare a lot of the misunderstandings surrounding the making of money as a business -chief amongst which is, perhaps, the notion that large sums of money coming in must equal large amounts of profit. Small profit margins can happen even when a business is bringing in millions of pounds in gross revenue, simply for the fact that operating costs can be similarly large.
Costs, sourcing and operational decisions
Here, then, let’s explore what these operational costs are – and how to manage them. Every business has overheads, in the form of rent for business premises and the cost of energy to power said premises. There are also licenses for necessary equipment or software, training for employees, and, of course, the paying of employees themselves.
Everything that costs money is a direct impingement on the potential for a business’ profit margins – and most things that cost money are necessary expenditures. This is why consistent re-evaluation of suppliers and materials sources is necessary to control expenditure; why pay showroom prices for new vehicle fleets, when car auctions enable smarter procurement that can significantly reduce short-term expenses?
Efficiency, pricing and long-term sustainability
It is this kind of thinking, at scale, that can have dramatic impacts on the fortunes of a small business – particularly in industries where profit margins are already famously thin, such as hospitality. But re-negotiating energy contracts and supplier agreements is but one part of a comprehensive, multi-faceted whole.
Operational and financial efficiency are not sprints, but marathons; without a consistent long-term approach to managing cashflow effectively, small businesses can expect not to last in the long term themselves. This consistency of approach needs to encompass shifting pricing strategies and ongoing cost control with a view to securing long-term profitability.