How You Can Increase Profitability in Your Business

Increasing profitability is one of the biggest aims for business owners, and often involves changing many small aspects of the business

How You Can Increase Profitability in Your Business

It would be nice to think, as a business owner, that you can just sit back and let the cash roll in. However, as we all know, profitability is a constant challenge, and creating and increasing it is perhaps the most fundamental – and difficult – part of running a successful business.

Sometimes it is a matter of changing something obvious about your company that can provide an instant shot in the arm for your company profits. More often, however, increasing profitability is about putting the right foundations in place for gradual, long-term improvements. In this article we will examine the ways your business can boost profitability in the short and long-term – read on to find out more.

What are some ways I can instantly boost my firm’s profitability?

Before you look at the more technical aspects of boosting profits, it is useful to step back and see whether there are any obvious areas of your business that could increase your margins if changed.

On way to increase profits is to find a way to reduce your costs or get rid of some hidden costs. Eliminating unnecessary overheads and reducing direct costs will obviously have a direct impact on your profits. Another key way of improving profitability is to see if you can increase your company’s turnover – especially if you make a high profit margin on each sale, increasing turnover is another sure-fire way of boosting profitability.

Additionally, the more you sell, the more your reputation in the market is enhanced, and the more customers you attract – creating a virtuous circle – and defending a high market share is easier than trying to maintain your profit margins.

Ways to increase your business’ turnover

There are various strategies you can try to achieve this. In particular, carve out a niche and focus on a specific market, understand its needs and divide this market into segments so you can tweak your offering appropriately.

Another way to increase turnover is by investing in marketing. Not only does this entail advertising and promotions; retaining existing customers is equally important. Consider extending the range of products and services you offer – and remember to actually sell to people, not just sit and wait for orders to come in.

Try to squeeze the value out of existing sales with methods like offering a premium or luxury version of your product or service, or perhaps move upmarket altogether. Stay ahead of the competition by keeping your product up to date, and keep comparing the quality and price of your offering to competitors to ensure you are one step ahead of the game.

You should also focus on your most profitable customers. Identify the customers who order frequently or in large quantities, who pay on time, and who do not require many resources to maintain.

Ways to reduce your firm’s costs

There are three main areas you can look at when cutting costs – direct costs, overheads and assets.

Direct costs are necessary expenditures for running your business, such as raw materials or supplies. Whilst you cannot eliminate these entirely, you can try to minimise wastage by specifying orders to the exact amount you need, negotiating better supply deals, and involving the person responsible for ordering in product development to maximise efficiency.

Overheads are the costs you incur in the day-to-day running of your business, such as rent, utilities and staff salaries. Keep a close eye on them at all times, as they have a nasty habit of escalating if ignored. Make sure your utilities are on the tariff that best suits your needs, and consider having a different broker review your insurance policies as a starting point.

With asset costs you should try to squeeze every penny out of these. Make sure your employees are being used effectively (see below), look at lifetime costs when purchasing new assets, and identify or create new space in your premises that you could sub-let to bring in extra revenue.

How to identify and limit hidden costs in your business

As well as the obvious areas for cost-cutting, you can look at how inefficiency leads to a hidden cost that may well be quite high. Too often, businesses are run without clear policy or direction or use inappropriate equipment, and whilst the cost of doing this is harder to quantify, you can implement improvements right away to reduce it.

One way to do so is to start by creating standardised systems; developing company-wide or department-wide policies and measures to deal with unforeseen circumstances is normally always worth the cost, as it can reduce the risk of things going wrong and allow you to step back from micro-managing the business. Remember to put checks in place to monitor whether employees are actually following company policy.

Also make sure to turn decisions into policies, which will mean you don’t have to be there to make the decision next time. Put it in writing for greater clarity and effectiveness. But make sure to keep these policies simple – don’t fall into the trap of overloading your employees with a mountain of bureaucracy; keep your policies as lean and easy to follow as possible.

Make sure to learn from mistakes, if systems or policies go wrong, fix them as quickly as possible – and review all your systems regularly to identify areas for improvement. If you find regular tasks – such as finding information – too time-consuming, look into how you can improve or automate them. Also make sure to the right equipment: particularly in IT, outdated or inappropriate equipment can be detrimental to efficiency. Replacing old equipment will normally pay for itself through productivity and efficiency gains.

Finally, don’t put off key decisions! Whilst you shouldn’t rush into things, delaying key business decisions unduly will delay progress.

How can my business improve its focus on profitability?

If you wish to improve profits in your business, it is often necessary to change what you focus on as a business. In particular make sure staff are aware of your focus on profitability. If employees – particularly managers and decision-makers – are aware of your goal, this in itself can have a significant impact.

Try to set up performance indicators and monitor them. You and your staff can monitor how well your profitability drive is going if you set targets against key performance indicators, such as sales against forecasts, gross profit margins, and sales against budgets and staff costs. For more information on this check out our article on monitoring key performance indicators here.

Finally, like with any task, minimising distractions will help to improve your focus on profitability. Discourage pet projects or those that don’t play to the company’s strengths. If your employees are unavoidably distracted by an impending event – such as a planned flotation – try to control the impact of this.

How can I use my staff to increase profitability?

As the people who carry out your day-to-day business activities, your employees will be crucial in any attempt to boost your margins.

From the offset (recruitment) you can encourage staff to focus on profitability, build talented teams that work well together, train them properly, and motivate them. Going forward, monitor how well they’re doing.

Also try to improve the working environment by reducing unnecessary distractions and build an environment that maximises profitability.

Finally offer support and reward to staff.  Make sure give your staff effective equipment, and make sure they delegate tasks smartly. Give them the information and support they need to carry out their jobs without recourse to you. Also in terms of rewards linking pay to effectiveness or profitability is almost certain to have an impact. Give employees meaningful career progression, and it goes without saying you should give staff praise when it is due.

How do I maintain my business’ profitability?

Try to implement a regular planning cycle – this will boost your ability to make continuous improvements on profitability in the future. This should include consultation, involve employees and other key players in your plans; set targets, make them time-limited and realistic; monitor effectiveness, see how well your plans are going and review the process – learn from experience and make continuous improvements

Increasing profitability is an obvious goal for any business owner but you must make sure to apply this incentive across the company; encourage good communication between departments and staff, and find ways to increase your employees focus on profits. For more help, check out our guide to motivating employees or benchmarking, which by – benchmarking parts of your business against each other – can be a good way of sharing lessons.

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