Profit as a concept is easy to understand, finding profit improvement strategies may not be but are essential for business survival and growth. If entrepreneurs and business owners do not understand how the profit in their business works then long-term survival is diminished considerably.
From a top-level view, profit can only be improved in four ways –
Sell more goods or services
Get your customers to buy more frequently
Increase your selling price
Decrease your costs
Using profitability ratios is a great way to monitor performance. Ratio analysis is only meaningful when compared over time. They help to focus your attention to a specific part of your business when considering profit improvement strategies. The three types of profit we recommend you monitor are stated in the sample profit & Loss account below: –
|Cost of Sales|
|Postage & Printing||£2,777|
As can be seen from the profit and loss account the higher the Gross profit margin (Gross profit/Net of VAT sales) the better it is for your business.
Other than the obvious of profit allowing owners of a business to make a return, profit improvement strategies are key to the growth of a business. Profit is often a key factor in attracting investors, vital when looking to expand your business rapidly.
Profit is a rock and roll factor when it comes to dealing with banks, it makes it easier to get funding as well as negotiate a lower interest rate. Let us not forget the people in your business, profits allow you to reward and motivate them.
Over time the business landscape is likely to change significantly for every sector and every business. As such its common to see profit margins drop from time to time. It is important to have profit improvement strategies visible on your risk register and to review them quarterly at the very least. Poor profitability leads to reduced cash flow and if not addressed business failure. Cash is king! Unsurprisingly the two main reasons for reducing profits are falling sales and or excessive expenses.
Falling sales may be a result of ineffective marketing i.e. your message to customers is not right. Marketing often is not seen as an essential spend. In times of difficulty cutting your marketing spend might well be the worst thing you can do. A better strategy would be to look at ways you can improve your return on marketing spend.
Business managers that have seen successful times can take their eye off the ball and not respond to changing market conditions. For example, many large retailers did not invest in online shopping and are now suffering lack lustier sales performance.
The wrong pricing strategy can mean disaster for a business. It essential to know your customer and how much they are willing to pay. You may set a price to high or too low that reduces your overall profitability. In the profit and loss above a 1% increase in selling price will lead to a 100% increase in net profit.
If you operate in the retail sector the following maybe very useful to you, online or high street store.
Our experienced part time finance directors can help you look at profit improvement strategies, helping you to streamline your business for profitability.
The Finance Equation Ltd is a company registered in England & Wales. Company number 05116983.
Business address: Finance Equation Ltd, 334 Ley Street, Ilford, Essex, IG1 4AF.
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