As a SaaS startup founder, you've likely invested a lot of time, money, and energy into launching your product. But despite all the hard work, you may still be struggling with a low operating income due to the substantial costs of technology, marketing, and human resources.
This can be a scary situation, and the risks you need to take to improve it can be even more frightening. But there are some innovative strategies you can use to improve your operating income without jeopardizing the long-term health of your company.
Operating income is your profit or remaining revenue after deducting operational expenses (OpEx) such as payroll, rent, and cost of goods sold (COGS) – anything related to running the day-to-day of your business.
When you’re looking to improve operating income, the first step is to consider all of your options. Take stock of what's working and what isn't. It may be worth bringing in a financial advisor or fractional CFO to help you understand the situation better and make decisions.
You can also reach out to investors for advice. The more guidance and wisdom you get, the more confident you feel about making the right moves.
But there is so much more!
In this article, you'll learn more about the strategies you can adopt to increase your operating income and the top reasons to consider them. By the end, you should better understand what it takes to get your startup's operating income back on track.
How Do I Calculate Operating Income?
You can calculate operating income by subtracting your business's operating expenses from your gross income or gross profit.
Operating income = gross income – operating expenses
This figure will give you a better idea of what your organization is generating from its core operations. It can also help inform decisions about making the most of the available funds.
For example, if your company had $10,000 in sales but spent $7,000 on production, shipping, and other operating costs, you would have an operating income of $3,000. You can use that money to cover overhead or invest in growth initiatives.
Keep in mind, though, that this figure does not include non-operational expenses such as taxes or interest on loans. You should account for these separately when calculating your net income.
How To Increase Operating Income
Once you understand what operating income is and how to calculate it, you can start thinking about strategies to improve it.
There are several ways to increase operating income, but they all have the same goal: to reduce expenses and maximize profits. From there, you'll be able to allocate income to the things that matter most to your business.
Identify And Reduce Expenses
The best place to start is by reducing your company's expenses. In a recent McKinsey study, more than 50% of executives surveyed expressed dissatisfaction with the lack of transparency around their budgets. Not knowing where certain money is likely means inefficient spending.
By identifying and reducing expenses, you may come up with a number of ways to reduce your overall costs. This could include reviewing subscriptions and licenses, negotiating better deals with vendors, and reducing COGS. You can also outsource certain positions which don't require full-time dedicated employees, such as a fractional CFO or human resource specialist.
Another effective way to reduce expenses is to lower customer acquisition costs. Consider affordable ways to attract new customers, such as through referrals or more targeted marketing efforts.
Increasing revenue is another way to improve your operating income. While it may sound like an overwhelming task that you feel you've already explored, there are always more opportunities.
Here are some tactics you can try:
- Find untapped revenue streams – Think about how you can use your existing services or products differently to generate more profits.
- Update pricing – Analyze what your competitors are charging and consider adjusting your prices to stay competitive. Be sure to factor in the cost of goods sold, overhead expenses, and other factors that affect your bottom line.
- Focus on customer retention – Invest in customer relationships by offering loyalty programs or discounts for repeat customers.
- Offer promotions – Regularly hosting special offers can help you draw in more buyers and boost the amount of money you bring in.
- Expand to new markets – Consider expanding your services or products outside their current geographical areas or finding new customer segments that might benefit from what you offer.
- Upsell every customer – Upselling is a great way to increase revenue without spending more on customer acquisition. You can offer existing customers additional products or services to enhance their experience and increase profits.
After you've implemented ways to increase revenue and reduce expenses, it's time to focus on how you can optimize your operations. This includes automating tasks and using technology solutions to streamline processes.
By investing in financial software and accounting tools, you can better manage your finances and reduce the amount of time spent on manual tasks. You'll also reduce potential errors or discrepancies that can lead to costly mistakes.
CRMs (customer relationship management) are another great way to improve customer management and help you better understand their needs. Having a centralized system for tracking customers' interactions with your business will allow you to identify areas of improvement and optimize the customer experience. This can result in more loyal customers, which means more sales and increased profits.
6 Reasons To Increase Operating Income
Now that you know some strategies for improving your operating income, you may wonder if it's really worth the effort. Let's look at the six main reasons why increasing your operating income is so important.
1. Generate Revenue
Increasing operating income allows you to generate more revenue and make money from your products or services. This is especially important if you need access to capital or loans, as it can be a great way to get your business up and running.
2. Achieve Profitability
With increased operating income, you can create the foundation for achieving profitability and covering expenses. Achieving profitability is important if you're just starting or are in a growth phase and need to cover costs associated with expanding your operations.
3. Attract Investors
A higher operating income is one of the best ways to attract potential investors. That's because it shows that you are profitable and capable of implementing strategic changes for growth.
4. Improve Existing Investor Relationships
Showing that you are achieving profitability and meeting financial obligations will make investors more likely to continue investing in your business long-term. Moreover, through demonstrated business growth, you can encourage them to increase their investment amounts or provide you with additional support resources.
5. Maintain Flexibility
Increasing operating income means you have more financial flexibility and don't always have to live paycheck to paycheck. This can give you more breathing room to pursue new opportunities or make investments in the future of your business.
6. Improve Cash Flow
A higher operating income means you will have better cash flow, which is essential for running a successful business. This can help reduce costs associated with borrowing and provide extra liquidity should any unexpected expenses arise.
Is It Worth The Risk?
While there are compelling reasons for expanding your operating income as a SaaS startup, it could also strain your current resources or lead to financial losses if not managed properly.
Cutting costs may seem like a great way to save money, but it could affect the quality of your product or service and ultimately have a negative impact on customer satisfaction and the health of your startup.
It's worth weighing all options with a financial advisor before moving forward. Understanding your risk tolerance and taking a strategic, long-term approach to your data and decisions can help you minimize potential losses while maximizing the rewards.
Look for ways to reduce the risk of certain decisions, such as diversifying your investments or spreading out expenses over a period of time. This can help you protect your cash flow and ensure that any risks you take can pay off in the long term.
By working closely with an experienced financial advisor, you can ensure that your decisions to increase operating income are intelligent and informed. In addition, your investors and other stakeholders may also be able to provide insight and advice on the best course of action.
If you need that finance support sooner rather than later, this is a great place to start.
Taking Action To Maximize Total Operating Income
As you grow, it's important to continually monitor and improve your operating income to sustain success. Taking advantage of opportunities to increase operating income can help attract investors and maintain financial flexibility. Strategies such as reducing expenses, increasing revenue, and maintaining flexibility can help you maximize total operating income over time.
While cutting operating costs may be risky, these decisions are often necessary for growth. Careful planning and insight from financial advisors can help you minimize losses and reap the rewards of increased operating income.
Suppose an in-house financial advisor is out of reach. In that case, the best fractional CFO services can provide access to knowledgeable financial experts who can help you make intelligent decisions about your budget and forecasts.
With the right tools and resources, you can make the most of opportunities to increase operating income and maximize success.