Improving Profitability

May 7, 2011 No Comments by admin
The purpose of a business is to make profit.  Curiously though, most business owners talk about increasing sales and very rarely about profit or cash.  It is not uncommon to find businesses that have increased sales yet have lower profits as a consequence.

Whilst there are many factors which can impact improving the profitability of a business, there are fundamentally only 4 things a business can do to increase profit:

1.      Sell more

2.      Sell more often

3.      Increase prices

4.      Reduce costs

Successful businesses build an understanding of the impact of decisions on profitabilty into their management processes.  You may have had experiences of your own where you end up embarking on a new initiative only to realise through subsequent analysis that the initiative is barely generating profit.  This usually occurs due to a lack of detailed strategic planning.  Profitability of any particular product or project should be evaluated at every stage: in the concept stage, in the launch stage and then periodically thereafter.  Business owners often know instinctively when a product or project isn’t working, but often look at increasing sales as the way to fix the problem when a more technical/detailed appraisal of the situation is required.Although profit and cashflow should not be confused it often follows that poor profitability leads to poor cashflow.  When profits are low and cashflow is poor businesses can quickly descend into a downward spiral.

Profit improvement should be seen as an ongoing project. It takes some time to establish systems, which enable your business to maximise its profitability, and then it takes focus and resource to maintain the monitoring process.

No comments