The fundamentals of improving business profitability comes down to five key factors:
- Reducing costs
- Increasing turnover
- Improving efficiency
- Increasing productivity
- Innovation and development.
In light of the current crisis, it is worth considering some top tips for improving profitability.
Cost management
Carefully managing and reducing your input costs plays a key role in improving profitability, but it must be balanced with the need to deliver a service or product of a quality high enough to maintain your customers.
No matter how well run a business is, there will always be a degree of wastage or a way to reduce costs. Businesses should look at their key cost areas, which will typically include:
- Suppliers
- Finance
- Premises
- Energy and utilities
- Production
- Staffing
To get an idea of the actual cost of each of these areas, businesses may wish to employ activity-based costing.
This method shows you how much it costs you to carry out a specific business function by attributing proportions of all your costs.
While this approach may be more complex and take longer, it will often show up potential cost efficiencies that other methods ignore.
This will also give a clear indication of the money spent on delivering a service or goods, which can be extremely beneficial to pricing strategies.
Review and improve
When was the last time you truly reviewed what your business offers, who buys your service and products and whether your pricing is competitive?
As a business owner, it is sometimes easy to lose track of these factors, which is why it is worth reviewing your current offering.
A good starting point in this process is to review your existing customers. It is worth identifying who your “best” customers are. These are your most reliable customers, who drive profits, not those who lead you to incur costs or affect cash flow.
Focus on their needs and how you can make improvements to increase sales to them. This may mean:
- Up-selling
- Cross-selling
- Diversifying
At the same time, it is worth reviewing your pricing strategies to make sure your products are competitive and not under–priced.
Better buyer
A key part of lowering costs is buying more effectively. Businesses should regularly review supplier relationships to see if they can secure their necessary resources at a lower cost.
To improve the review process, it is worth identifying the key areas of expenditure to show where the business spends its most money.
This will show where the most benefit may come from reducing costs. You can then begin to shop around to see if you can reduce the cost of this expenditure.
When you find a better deal, speak with existing suppliers to see if they can match it or improve upon it. Remember, you are a valued customer and a known entity.
If you cannot strike a better deal then don’t be afraid to switch to other suppliers, but don’t burn any bridges along the way.
Expand your market
It can be stressful and scary moving into a new market, but it can completely transform the outcomes for a business if it is conducted properly.
Going into business is never without risk and the same can be said for entering a new marketplace. Businesses will have to consider the costs and ensure that they do not lose focus on the existing aspects of their operations.
The first and most important step in diversifying is research. Businesses need to understand the costs involved, their potential market and prospects for profits. Take the time you need to develop a plan and make sure you have the information to make the right decisions.
Once you have a greater appreciation of the market you intend to enter you can tailor your product or service to fulfil its needs, this could include:
- Filling a niche
- Offering a lower-cost alternative
- Providing a higher quality service/product
- Reviving older ideas to reflect a change in the market
- Offering efficiencies and innovation.
If you are concerned about the risk of doing this alone it may be possible to form partnerships or joint ventures that provide greater security within a new or expanded market.
The productivity challenge
One of the more difficult elements of profit improvement is likely to be productivity. Most businesses appear to be working flat out at all times, so where can improvements be achieved?
Before even attempting to improve efficiency, it is important to get a baseline to benchmark changes against.
Businesses must measure their operational efficiency on an ongoing basis by putting systems and processes in place that allow key metrics to be recorded and analysed.
This could, for example, include how many work hours it takes to perform a certain task or manufacture a certain product. This will allow you to review whether an improvement you make increases or reduces the time taken.
Once you have an idea of how your business is performing you can then look to make changes, such as incentivising staff through bonuses or investing in automation to speed up the production process and reduce man-hours.
No single solution
Each of these tips on their own is useful, however, when combined and developed into a more detailed profit improvement strategy it can have a real impact on the survival and success of a business.
Putting together this information and developing a plan is no simple or quick task and for a busy business owner, it may mean more work and stress. That is why it is worth seeking out professional help to drive home profit improvement and monitor the success you achieve.
