Businesses have many areas to watch out for, but one of the most important aspects to note is its profitability.
We look at this key area and the different methods a business may implement to improve profitability!
What is Profitability?
Profitability is the ability to earn a profit. It is the difference between a company’s total revenue and its total costs.
Why is Profitability Important to a Business?
A business’ success depends on its ability to earn profits – it is key to its basic survival.
A positive bottom line also reflects well upon the company’s performance to potential investors when funding is required for business growth.
Profit also translates to capital that can be used for different uses, like replacing old equipment, hiring more staff, investing in new products, and more.
Therefore, it is no surprise why many businesses seek ways to increase profitability.
How is Profitability Measured?
It is vital to know that a rise in profits may not always lead to better profitability. Companies use profit margin, a profitability ratio, to determine profitability, which is a better measure than looking at revenue alone.
Profit margin measures how much a company retains in earnings from every dollar of sales created. It is expressed in a percentage and is derived by dividing a company’s net income by the total sales generated.
What Are the 3 Types of Profit Margins?
There are 3 main profit margins listed in financial statements.
Operating profit is the difference between a company’s total revenue and its total costs.
It measures how much money a company makes from its normal business activities, before accounting for the cost of goods sold (COGS) and the cost of operating expenses.
Net profit is the money that is left over after a company subtracts its costs from its income. This money can be used to pay back debts, reinvest in the company, or give money to the owners.
Gross profit is the difference between a company’s total revenue and its COGS. It is used to calculate a company’s profitability.
What Are Some Ways to Improve Profitability?
Reducing Costs by Streamlining Operations and Reducing Waste
A common misconception is that increasing sales translates to increasing profitability. However, when you decrease expenses, it has a greater impact that will improve the metric faster.
One way to do this is by streamlining operations and reducing waste. There are a number of ways you can do this, such as
- Evaluating your current processes and making changes where necessary
- Identifying areas where you can save money without sacrificing quality or customer service
- Reducing unnecessary costs and expenditures, such as on marketing or administrative costs, or even on raw materials to create products by negotiating prices
- Automating tasks wherever possible to reduce labour costs
- Streamlining production processes to reduce waste and overhead costs
By taking the time to explore these cost-saving measures, you can improve business profitability while keeping your company running smoothly.
Increase Prices to Reflect the True Value of the Product or Service
While it may be difficult to raise prices in a competitive market, it is important to make sure you’re charging what your product or service is worth.
You must ensure you are making a fair profit on each transaction. Do not be afraid to raise prices if it means you can offer a better product or service – your customers will appreciate the value you are providing.
Find New Markets to Sell to or Expand Existing Markets
It is essential to explore new markets to sell to or expand existing markets to boost your bottom line.
If you are not sure where to start, do some research on your target market and see where there might be opportunities for growth.
You may also want to consider branching out into other industries that complement your business. With the right planning and execution, you can significantly grow your business and improve profitability.
Look at Your Most Profitable Customers
Your clients are a primary source of financial value for your business. Apart from looking for new clients, you should also assess your current customer base.
Who are the most profitable customers that you should retain and grow?
How can you make these customers stay with you and continue an upward spending trend over the long term? Having a better understanding of your best customers will help your bottom line in time.
Develop New Products or Services That Appeal to Current or New Customers
It is also important to develop new products or services that appeal to your new or existing customers, or you may lose customers over time.
If you are not sure where to start, do some research on your target market and see what needs still aren’t being met.
You may also want to consider developing products or services that are complementary to your current offerings. It is how you can enhance your business profitability and ensure business continuity.
Reduce Dependency on a Single Customer or Market
If you are too dependent on a single customer or market, you are at risk of losing business if something were to happen.
You must develop a solid customer base that is not reliant on a single source.
You can do this by expanding your marketing efforts to new markets or customers, or by developing new products or services that appeal to a wider audience.
Establish an Alliance or Joint Venture
A strategic alliance with a company that complements your own business may help to propel both firms further.
This partnership can open new pathways to new customer segments and markets, especially with the cross-promotion of your products or services.
Improving Business Efficiency With a Suitable Structure
For companies looking to set up a new business, choosing the right business structure offers these benefits:
- Operational efficiency
- Tax efficiency
- Business model efficiency
When your company is efficiently managed and optimised, it can result in improved profitability.
Improve Profitability Now With InCorp’s Expert Advice
There’s never been a better time to make your business more profitable.
InCorp Global’s business advisory experts can help you achieve optimal efficiency to streamline operations and achieve greater profitability!
So, what are you waiting for? Start making your business work smarter – not harder.
FAQs in Ways to Improve Profitability
- A company's profitability is a measure of how much money it makes relative to its costs. A company that is profitable is making more money than it is spending, while a company that is unprofitable is spending more money than it is making.
- Some ways to improve profitability are:
- Reducing unnecessary costs
- Focusing on core customers
- Creating and innovating new products
- Our business experts are ready to offer you practical and proven advice to boost your bottom line.