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How Small Businesses Can Boost Profits

Too many small business owners are focused on making payroll, not profits, says Patricia Sigmon, founder and president of David Advisory Group, a Manhattan consulting company, and author of Six Steps to Creating Profit (Wiley 2010). Sigmon, who also founded and still owns a $2 million, 10-employee computer consulting business, LPS Consulting in Fanwood, N.J., spoke to Smart Answers columnist Karen E. Klein recently about boosting profits in small businesses. Edited excerpts of their conversation follow.

Why do many small businesses lag in profitability?

The No. 1 reason is small business owners don't have the answers in hand. They have no idea that they didn't make a profit, or that they had a loss. They are chasing payroll money every month, they're getting deeper into debt, and then they have one bad month—and they're dead.

Too many small business owners don't know the difference between "busy" and "profitable." Small businesses that wait until the end of the year to look at financial reports can lose a lot of money being "busy"—especially in a recession.

Are CEOs not looking at monthly or quarterly financial data?

Some might be, but even then they're not capturing real-time data. A lot of small business owners still have payroll clerks entering last week's numbers into spreadsheets. They use a patchwork of software programs that don't talk to each other and don't calculate actual costs.

Aside from upgrading their technology so they're better informed, what else do you recommend for increasing profitability?

Everyone in your organization must be pitching in to improve the bottom line: networking, marketing, selling, cutting costs. If you have employees who show up to take a paycheck and don't contribute, their jobs should be on the line. Small businesses cannot afford that mentality anymore. Every department should be looking for ways to save money on what they are doing and help the company earn more.

So many companies have cut back in the last few years. Where else can they find cost savings?

If you're sitting there with long-time contracts in place, you're overpaying, without a doubt. Almost every vendor we deal with will cut our cost if we call them—DSL, telephone, e-mail service providers, everyone will renegotiate. There's not a line item that can't be addressed and probably reduced.

I see people who still have postage meters in their offices. Bookkeepers are sitting there writing checks and mailing them, although electronic banking has been around for years now. Maybe there are specialized tasks you could outsource or assign to a part-timer. Even saving a few thousand dollars a month can be huge for a small business.

What about boosting profits by bringing in more revenue?

Try cross-selling products or services that are complementary to what you already do. Go into your chiropractor's office, and he might have vitamins sitting there that you can buy. If you're a landscaper, offer to clean clients' gutters. If you have a great big book of business, that means you did the hard work and got the clients. Now it's time to sell more to them.

Another idea is the "relationship-based" sales model that gets clients coming back to you. Offer monthly or yearly service plans, or bundle services at a discounted price. This model boosts cash flow, gets your revenue up, and helps you come up with a valuation for your business­—based on number of contracts—if you want to sell it.

You recommend staying "visible and connected." What does that mean?

A lot of businesses that have been around 20 or 30 years want to rest on their laurels, but it's not about having a building in the middle of town anymore. While your plumbing clients are going away, a new guy is getting on the Internet advertising day-and-night service and the best prices in town. And that's where people are going to look for plumbers. Even former customers may not remember you.

Being recognized now means being on Facebook, Twitter, LinkedIn, having a blog, a website, and increasing your search engine optimization. You can't avoid it anymore. Once you're out there, you need to emphasize your credentials. Tout how many customers you have in your community or how your employees are certified. Even if you've been around for decades, it's important to stand up to the competition and wear your reputation on your sleeve.

You run a computer consulting company. How did you go from computers to writing a book on profitability?

Consulting on profitability is part of what I found myself doing in my computer business, which I started 28 years ago with the advent of the PC. My clients are small companies in the $5 million to $25 million range; many are family-owned manufacturers and service providers. In this recession, I saw a lot of them going out of business so fast they didn't know what hit them.

What did you tell them?

Even if you're losing money, if you have a book of business, there's always hope. There are ways to cut administrative costs, creative ways to improve your bottom line, and you can absolutely change things if you try.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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