There are hundreds of articles written about increasing profitability and it’s easier said than done.
The easy part is to understand what needs to be done but the hard part is achieving it especially in large businesses.
That said, there are only 2 parts of a formula you need to look at – revenues and costs. Since these make up your profits, the easy bit is realising that you increase one and reduce the other to increase your profits.
The hard part is to understand where to start. So here are some key tips in achieving increased profitability for your business by looking at revenues and costs separately.
A. Revenues
- Get the pricing right – make sure your products are priced to give you the profit margin required, i.e. price less direct costs to produce gives the gross profit and if this margin gets eroded over time, you need to look at increasing your prices. Many businesses shy away from touching their prices and this is a great mistake if your product and service is excellent. Premium pricing may also increase your volumes.
- Maximise volumes – try to maximise your sales volumes and you may be able to negotiate higher volumes with major customers if they get the right price point. Of course, if you’re selling a premium product in low quantities, like Ferrari, then you need to maximise the quality and price.
- Get the product mix right – make sure you know the gross profit margin for each product and if need be cut out the lower margin lines. It maybe that you have to sell a range to keep your customers happy but many global players sell off brands all the time and the key reason for this is to maintain higher profit margin products and not dilute their efforts. Why not add higher margin premium products or services and get away from the lower margin ones?
- Explore new markets – consider new emerging markets and even joint ventures if the cost of entry is too high. Staying in the same markets will put pressure in the long-term especially if you make high profits since new players will enter into your market. Have you fully exploited internet sales?
- Compare yourself to the competition – you should constantly monitor your competition. Are their profits margins higher? If so, they either have higher volumes, prices or a combination of both or lower costs. What can you do to reach that point?
B. Costs
- Control direct costs – make better deals with you suppliers to reduce your direct costs since this can impact the product margins for a long time. Consider changing suppliers without losing quality. Can you consider moving production to lower cost countries? You don’t have to be a multi national to source production overseas.
- Reduce overheads – look at your support services such as marketing, finance, premises, offices and other external services and consider if you’re getting value for money. Are your overheads higher than the competition? Outsource functions that can be done better and more cost effectively by someone else.
- Manage cashflows efficiently – even a profitable business can have cash flow problems.Ensure your major customers have the correct credit limits, be flexible if it can get more sales but make sure you collect their cash. Get fast payment discounts from your suppliers.
- Measure productivity – your staff can be your biggest cost and by improving productivity by small margins can massively improve profitability. Link performance to rewards and share some of the profits with your staff and praise them when they do a good job. It will motivate them towards achieving your goals.
- Involve your staff – staff are usually a company’s biggest asset, so communicate the company objectives regularly and keep them informed of progress. Involving them in cost control programmes will help to keep costs down. A bottom up approach is more effective than a top down approach in controlling and reducing costs.
To achieve all the above, you must have focus and the right systems in place. Also having key performance indicators throughout the business will help staff to monitor progress effectively – see my blog on KPIs’ http://bit.ly/13XYyjc and also http://bit.ly/10JUfrd
Are you doing any of the above?
[Contributed by Asoka, Independent Finance Director and Management Consultant based in London. He works with growing companies as their part time Finance Director and is the Founder of AKCA Consulting, which helps companies improve their financial health.]
