Running your own business can be tough – because there’s so much to keep track of and organize and sometimes your profit isn’t as high as you would like it to be. These four simple and easy to implement profit strategies will help your business succeed this year. Andreas Nest has run a variety of successful businesses and now uses his skills to help others achieve their financial goals. Below, he tells us his tried and tested strategies to improve profitability and improve the financial performance of your business. Let’s get started!

Profitability – how do you evaluate the things you do to ensure you are making the most out of your productivity to ensure your profits are up?

Understanding profitability

Profitability stems from the word profit and frequently the two words ‘profit’ and ‘profitability’ tend to be used to describe the same outcome. However, profit and profitability are not the same.

To really understand if a company is profitable, or makes a profit we need to first look at the definition of both words.

Profit:
No matter the size of the business, or the industry in which it operates, a company’s objective is always to make a profit. Profit is an absolute number determined by the amount of income or revenue above and beyond the costs, or expenses a company incurs. It is calculated as total revenue minus total expenses and appears on a company’s income statement.

TOTAL REVENUE – TOTAL EXPENSES = PROFIT

Profitability:
Profitability can be defined as the ability of a business to produce a return on an investment based on its resources in comparison with an alternative investment. In other words, profitability is the ongoing ability to have the profit of the business exceed the outgoings. But because a company can realise a profit does not necessarily mean that the company is profitable. Therefore, profitability is a measurement of efficiency within a company and ultimately determines its success or failure.

Here is the key difference – while profit is an absolute amount, profitability is a relative one. It is the measurement used to determine the scope of a company’s profit in relation to the size of the business.

To understand if a company is healthy and profitable, a business owner cannot solely rely on a simple profit calculation. Instead, an in-depth look at a company’s operation is necessary to understand if the company is efficiently utilising ALL of its assets.

So, how do companies improve their profitability?

In my experience, there are four main strategies to improve a company’s profitability:

1. Increasing sales by upselling and cross-selling

Increasing sales is the simplest profit strategy. What is the easiest way to increase sales? It is to sell more to someone who is already buying.

How many times have you gone to a store or an online shop with a specific purchasing mission in mind and ended up spending more, for whatever reason?

For example, how many more French fries does McDonald’s sell every day by simply asking, “Would you like fries with your burger?”

It’s simple: if you’re not taking advantage of opportunities that show up every day, you are missing potential sales and ultimately reduce your chances of becoming profitable.

2. Truly understanding your profit margins

It’s simple; you need to make a profit on everything you sell. This may sound incredibly basic but the whole point of any transaction is, after all, to make money.

But which of your products or services have the highest profit margins?

The products or services you sell must make enough profit to at least cover all the costs, including the time you spend to make the sale. You’re in business to make money, so you must show a profit on each sale. Identifying the products and services that have the highest profit margins (and that make your business the most profit!) is an important step in increasing the profitability of your business.

3. Benchmarking your prices against competitors

When was the last time you benchmarked your prices against those of your competitor(s)?

One of the easiest ways to improve profitability in your business is to simply increase the prices. Benchmarking your prices against your main competitors will provide a good indication of what pricing the market will accept. Repeat this exercise at least once annually.

 

But remember, this exercise comes with a business health warning: be very careful not to price yourself OUT of business.

4. Reduce costs

Let’s not forget about your costs, because one of the biggest obstacles to profitability is having costs that are just too high.

Firstly, take a very close look at your cost base and see if you can reduce your costs or get better value for your money.

Take the time to renegotiate your outgoings with all your main suppliers on a quarterly basis.

Don’t forget to take a look at your team and understand why do people leave your organization. Make sure to keep your team engaged and motivated and ensure you run a very lean operation. High staff costs eat profitability like nothing else in a business.

Now you understand a bit more about profitability it’s time for you to take ACTION and become a profitable business. Utilise these four simple profit strategies to improve financial performance in your business!

Andreas and I talked about business and its challenges in a recent interview (which you can see below) and you can contact Andreas direct at andreasnest@actioncoach.com

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