A question that business owners often ask themselves is: How can I make more money? And often their instinctive answer is: Increase revenues. However, increasing revenues makes sense only if it can boost your profits.
So how can businesses improve their bottom line? I generally recommend five key steps:
1. Assess the overall profitability
Periodically analyze your business’s gross profit margin and operating margin and compare them to those of the best companies in your industry (or related industries). Benchmarking in this way can help you identify opportunities for improvement. You will need to review the Income Statement at the company level to assess the overall gross profit margin and operating margin.
2. Evaluate individual components
Review the profitability of various areas of your business such as individual products or services, business lines, individual jobs, geographic locations, clients, etc. This will allow you to focus your attention on the winners and losers. You will need to review the Income Statement by class or by category to assess the profitability of the individual components.
3. Weigh your options
Consider what actions you could take to improve profits. Your options might include reducing costs, increasing prices or eliminating unprofitable products and clients. You should carry out a thorough assessment for each alternative including creating scenarios for possible outcomes. Using your base scenario, perform a scenario analysis for each option and compare the projected bottom line.
4. Come up with a plan
Select the best option from the results of the scenario analysis to improve your business’s profitability and devise a work plan for implementing your decisions. You will need to perform a cash forecast to determine if you need additional financing to execute your plan.
5. Set targets and review regularly
Based on the options you have chosen, you should establish a schedule with ambitious, yet realistic, targets. You should then conduct a rigorous monthly or quarterly follow-up to make sure the plan is on track or implement corrective actions. Set a budget on the action plan and compare it against actual results on a monthly basis to see how you are progressing.
A key success factor to boost your profits is to ensure you are properly costing for all inputs into the products or services. In many cases, the business owner does not have accurate costing systems, leading to wrong conclusions and bad decision-making. Using a cloud accounting platform such as Quickbooks Online can facilitate this process and reduce errors from manual data input.
As well, entrepreneurs should make sure they have a clear understanding of their value proposition to the market (why clients should buy from them). This will help them determine the best options for increasing profits.
For instance, a decision to eliminate an unprofitable product may lead to a loss of customers who want to get everything from a single supplier. Or, a business might conclude a price increase to give the perceived value of its products or services over those offered by competitors.
You have to determine what sets your company and its products apart from the rest. It may be possible for you to raise your prices without negatively affecting profit.