Sky Accountants have reviewed and analysed numerous businesses and have seen patterns emerging. There are differences between money-making businesses and average ones, and characteristics that separate the efficient and highly profitable ones from those who simply break-even. Revenue management appears to be very important.
The differences are not based on the product, industry, leadership or culture – they are often found in the choice of business model. Financial wealth is the ability of your business to generate good cash flow and profit. While it is equally important to provide value to your customers, your business also needs to be sustainable and you need resources.
What makes a business model more profitable than others?
Does your company expect recurrent income in the future? These revenues can be predicted and allow you to forecast growth and know how to spend your resources. Recurrent revenues allow you to get a more accurate computation of your customer acquisition costs. Remember that costs to acquire these recurring or regular customers are more efficient than one-off sales. You should aim for these customers to be part of your overall sales because predictable revenue is ultimately related to your business’ value.
It is also important to have a unique brand. It doesn’t matter if you have an innovative product, your business model or design may already be enough to drive your business to success. However, you also need to make sure that you have great distribution channels. How effectively can you get your product to your customers? Your distribution channels translate to your business’ scalability; make sure they allow your business to effectively and efficiently expand its market size.
You should take a look at your gross profit instead of your sales because measuring the former shows you the quality of the latter. Your goal is to achieve the highest gross profit margin possible because these earnings can be reinvested in customer acquisition or product development to grow your business. A good business model usually has a gross profit margin above 50 per cent. Make sure your revenue management is in order by speaking with your accountant.
Another factor that makes a business model more profitable is a low cash conversion cycle or the number of days it takes to turn your profit into cash. It shows your business’ liquidity and capital’s efficiency. You should aim for the fewest possible days it takes to turn your profit into cash, so you can reinvest back into the business to avoid a tight cash flow. Online concession shops that require advanced payments usually have a cash conversion cycle in the negative. The number of days they hold inventory and collect receivables is often fewer than the days they would need to pay for their accounts.
It would be beneficial going into an industry which is relatively difficult to enter, as this would mean less competitors in your niche. It could be a complex business model with regulation, licensing and fees – in contrast to opening a toy shop, for example, which can be pretty easy and fast to do.
As you look for different ways to grow and improve your business, seeking professional advice on revenue management could prove to be an important and helpful decision.
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