September 09, 2020

How to Increase Your Business Profitability

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How to Increase Your Business Profitability

Business and sales are moving faster today than ever before. Every day it becomes harder and harder to compete with your competition. At the same time, for every entrepreneur, profit is a crucial part of being in business. Fortunately, there are some strategies that you can implement to set yourself apart, create more value, and generate more sales. 

Profit vs. Profitability

Before we share some strategies to increase profits in your small or large business, we would like to point out the difference between making a profit and being profitable. When we talk about profits, we imagine some differences between turnover and the costs. However, the shareholders care not only about how much a business makes in profits, but also its profitability. Let’s review an example.

Company NameProfitsInvested Capital Profitability
Company A$50 million$500 million 10%
Company B$25 million$100 million25%
Company C$10 million$300 million3%

When we look at the profits of the companies above, it might seem that Company A management is doing the best job. However, when we consider how much was invested in each company and calculate their profitability (Profits/Invested Capital), we will see completely different numbers. 

Now, one can realize that Company A is not doing as great as we originally thought. Surprisingly, the company that had the least money invested in it, made the most use of them. The management definitely knows what it is doing and will be more attractive to investors (and shareholders) because it multiplied their money more. At the same time, if you do not increase your profits, your profitability will not be increasing as well. Thus, profits play an important role in your profitability. 

How to Increase Your Business Profitability

10 Ways to Increase Profits

In general, you cannot increase your profits directly, only indirectly. Neither you can do it without a specific strategy. Let’s look at simple ways you can increase the amount of money your business makes. Although these strategies are not complicated, they will be easier to implement and, accordingly, achieve good results.

  1. Marketing 

This might be obvious for some, while others might consider advertising as just another expense. Businesses, though, need to analyze their marketing strategies and get the market to understand why they need and should use your product or service. If 5 out of 10 people who come to your business buy your product or service and you attract 15 people instead of 10, you will increase the number of customers who actually buy from you.

  1. Efficiency

It is not just about cutting costs to increase your profits. It is about efficiency in the way that you spend the money or the productivity of your employees. Thus, you need to look for ways to stimulate better productivity and motivate your employees, as well as ways, for example, to better use your inventory storage space. This will allow you to cut costs per product/service and increase your profits. Even a small improvement can make a big difference.

  1. Customers

A customer is the main source of income for most companies. Thus, dedicate yourself to serving your customers in the best possible way and your sales will take care of themselves. If can convert visitors into customers that make purchase, you have effective sales efforts. To achieve this, you need to have sales training for you and all employees who interact with customers in some way. 

  1. Transactions 

Besides attracting new customers, you should focus on increasing the number of transactions or how many individual purchases your customers make. If your customers will make purchases more frequently, you would increase your revenue and profits accordingly. Either way, you will probably need to also increase your marketing budget to do it. 

  1. Referrals

You can raise your profits by setting up a referral program. A referral is the act of an existing customer recommending or vouching for the value of a company’s products or services to another. If you have a truly valuable proposition and your customers walk away satisfied, you won’t even need a special program to get referrals because the good word will spread on its own. 

  1. Costly services

Your management can also eliminate expensive services that you no longer need. Evaluate the costly services to customers and see if there are any that you can discontinue without making your customers unhappy. Even small things can slowly eat up your profits without given back much. 

  1. Slippage

Profits are often eaten away by what is called slippage. This is the difference between what you have estimated the job would cost and how it actually comes in. start digging into your job cost to identify exactly where the overruns are happening and either fix the problem or adjusts your costs in your estimates. 

  1. Break-even point

You can reduce your break-even point, which is the point where the gains equal losses and the investment will start generating a positive return. In fact, look at all expenses that you incur to make more money as an investment with an expected rate of return that is greater than what you invest. Look at your activities and purchases and if they do not help you generate profit, eliminate or minimize them. 

  1. Prices 

You might think that you cannot increase price in your market. However, if you know that you offer a good-quality, worthy product or service and your people are friendly and helpful, try to increase the price just a couple of percentage points at a time. Your customers might not even notice it. 

  1. Volume

If you are truly at the top of the market with your price, than you can increase the volume that you are producing to deliver the dollars needed. This means selling more of the work you are currently producing and/or increasing your company’s average job size. 

Conclusion

There are many factors that influence the profitability of your company. Increasing your profits is possible by changing the variable you have control of. You might need to take just one of these steps and it will make all the difference in your company. For others, it might be a little bit of each of these. Whichever path you choose remember that you can build a company that can deliver a fabulous future, but it is not going to happen by itself. It is up to you to make it happen and we are sure that the tips we shared will help you guide it in the right direction.

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Author: Charles Lutwidge

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