Increasing profitability is something that all business owners strive for yet many do not know the most effective ways to go about doing this. Essentially, increasing your profitability means taking action which will have a positive impact on your bottom line – sometimes this could be from a single factor or making multiple adjustments.
It is also important to be aware of different profitability ratios. Gross profit margin (GPM) tells you the cost of production and is established by dividing gross profit by net sales and multiplying by 100. Operating margin factors in operating costs and is worked out by dividing your operating profit by net sales and multiplying by 100. Return on investment is another key profitability ratio which is simply worked out by dividing the benefit of an investment by the cost.
So, how can a business go about increasing profitability?
- Reducing costs
Reducing costs is one of the best ways to increase profitability because it is an area that you have complete control over. There are many ways to reduce costs but you must be careful not to decrease the quality of the product/service.
- Find New CustomersAttracting new customers is tricky but can be highly effective at boosting profitability. Increasing your marketing efforts and encouraging existing customers to recommend your business are both highly effective strategies to try.
- Adjust Pricing Strategy
It is a smart idea to review your pricing strategy on a regular basis and you might find that a slight change could boost your profitability. This needs to be an area that you are very careful with, however, as it can be easy to deter customers with a price change.
Auditing is a smart way to increase profitability and improve your business as a whole. Specialists like RSM can come in to monitor and analyse your companies financial health and identify ways in which you can make improvements to your operation. Sometimes it can be hard to identify areas in which you can make improvement from within so having an outsider and specialist auditing can make a big difference to profitability.
Streamlining the business operation can increase productivity, reduce errors, improve the quality of the product and speed up the operation. How you streamline will depend on your current operation but you should analyze each process to see if improvements can be made and try to see if you could implement technology to streamline and automate key areas.
- These are the 5 key areas to focus on if you want to increase profitability. All business owners want to know how to increase profitability but it can be hard to know how to go about doing this. Sometimes it will require big changes but you might also find that a few smaller changes can be highly effective too.