Profit is at the core of success for any business, so it follows that all business owners, directors and CEO’s are constantly thinking about how they can improve their profit – or at least they should be! Improving profitability requires looking at business performance on a far wider perspective than simply growing revenue.
Although there are a range of different factors which come into play when looking for opportunities to increase profit, fundamentally there are four major strategies that a business should consider:
- review pricing strategy;
- reduce direct costs;
- reduce indirect or overhead costs;
- increase sales volume (selling more without significantly impacting on pricing, direct costs or overheads).
Within this framework the following initiatives may be useful and effective to help make your business more profitable:
- Analyse every area of gross profit to understand where the biggest opportunities lie, and to determine how to reduce or eliminate less profitable activities;
- Analyse profitability by customer, product, revenue, SKU etc. to gain the best understanding of what is driving the business and where profits or losses are being generated;
- Increase prices – for example assuming a company has a GP of 15%, and prices are increased by 5%, sales volume would have to decrease by 25% or more before the company would be generating less profit;
- Systematically and continuously measure, report and analyse KPIs (Key Performance Indicators) to identify negative trends at an early stage, and then determine strategies to combat these trends;
- Review pricing arrangements with existing suppliers;
- Research alternative suppliers across all areas of the business;
- Research sources of grant funding;
- Determine eligibility of R&D (Research & Development) tax incentives;
- Develop effective incentive schemes for staff to encourage productivity and to manage risk;
- Analyse competitor activity;Review significant overheads and non-productive processes to identify opportunities to reduce expenditure;
- For exporters and importers, Investigate exchange rate hedging;
- Create a realistic and achievable business (action) plan and communicate this plan to all employees;
- Investigate online selling;
- Explore cost effective ways of marketing (social media etc);
- Continuously forecast where the business is heading (and compare to business plans to identify reasons for key variances);
- Develop customer relationship monitoring systems and customer retention strategies to prevent any potential loss of revenue.
As you can see, there are many strategies and initiatives to put in place to help increase your profit, and in fact almost every area of your business will somehow impact that bottom line. Small changes can sometimes make drastic differences to profit, so it is definitely worthwhile to looking into some of the above strategies and see where you can apply them to your business.
– Tips by Camryn Turner (Director of Finance Free TV Australia Limited)