Profit Improvement Strategies – Why It’s Important?

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 –Profit Improvement Strategies Finance Equation

Sell more goods or services

Get your customers to buy more frequently

Increase your selling price

Decrease your costs

 

Profitability ratios for profit improvement strategies

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: –

Ratio £ £
Sales £1,214,077
Cost of Sales
Opening stock £120,551
Purchases £1,000,124
Closing stock -£125,003 £995,672
GROSS PROFIT 17.99% £218,405
Operating expenses
Salaries £120,000
Travel Costs £14,151
Postage & Printing £2,777
Telephone £4,004
Advertising £10,500
Legal costs £2,000
Depreciation £10,000
office rent £15,000
other costs £5,000 £183,432
OPERATING PROFIT 2.88% £34,973
Loan Interest £25,008
Taxation £1,893 £26,901
NET PROFIT 0.66% £8,072

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.

Why is profit maximising important?

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.

Reason for falling profits

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.Profit Improvement Strategies Finance Equation

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.

Profit improvement strategies – retail sector

If you operate in the retail sector the following maybe very useful to you, online or high street store.

  1. Avoid markdowns by improving inventory visibility – even if you only have an online store, product visibility is key to managing stock effectively as well as reducing product mark downs. The fashion store Zara are a good example of how to do this.
  2. Increase your average order value – if you are successful in getting customer into store or online then find ways to make them spend more. This is true for any business or sector. Your existing clients are a great way for you to sell more. Get to know your clients.
  3. Implement savvier purchasing practices – always ask for supplier discounts or offers. Think about the final cost of the product you are looking to buy. If you are not willing to pay the final cost, then maybe your customers will not either.
  4. Increase your prices – in the profit and loss shown above a 1% increase in prices will lead to a 100% increase in Net Profit. Doing this does depend on your customers. Get to know your customers. Think about the quality of your product compared to your competitors. Think about how you can improve your brand image and customer loyalty, these things can help to increase your prices and profits.
  5. Identify and eliminate waste throughout your business, this one thing alone can have a dramatic impact on profit improvement.
  6. Inspire staff to do more – Harvard Business review suggests businesses lose over 20% of their productive capacity to organisational drag i.e. the processes you have set up in your business may actually stop stuff getting done.

Our experienced part time finance directors can help you look at profit improvement strategies, helping you to streamline your business for profitability.

Posted in Business finance, Business Planning

Leave a Reply

Your email address will not be published.

Contact us

    Submission of this form confirms acceptance of the terms in our privacy policy.