Profit is often seen as a critical indicator of success, so, naturally, every business wants to achieve it. Beyond this, profit is key to putting money in the pockets of owners, staff and other stakeholders. It also drives return on investment for any shareholders you have and can be repurposed for business growth if you are hoping to scale up.
However, profit doesn’t come immediately or easily. Entrepreneurs may work for years before they start generating a profit, especially if they’ve already invested a great deal of money setting their business up.
Even when you do start generating profit, it’s not guaranteed. A month of poor sales or unexpected expenditure can quickly eat into your profit, leaving you with less money at the end of the day.
If you’re not achieving your profit targets, it can be worrying, and you may be asking what you can do to help. In this guide, we’ve listed our five top tips to improve profitability in your business.
Manage costs
One of the easiest ways to improve profitability is to control your costs better and look at what you can do to lower them. If you’re spending less through a practical cost management approach, it means more of your revenue can be converted into profit.
When seeking to manage your costs, you need to start by monitoring your regular expenses and identifying opportunities to remove or lower them. Examples could include cutting out unnecessary spending and overheads (for example, supplies you don’t need any more), negotiating with suppliers to get a better deal or even switching providers.
Conduct regular expense audits to frequently review your costs and take action to bring them down when appropriate. This will also prevent expenditure from rising over time without your knowledge, as well as keep your sales and costs balanced consistently for good cash flow.
Review your pricing model
Every time you make a sale, ideally, you will profit from it. However, the only way to secure this profit is to make sure the price you charge for your goods and services outweighs the cost it takes to provide them.
If you aren’t making sufficient profit, it could indicate that your prices are too low – meaning you need to review your pricing model.
When changing your pricing model, aim to find the balance between covering your costs and remaining competitive in the market. It might be helpful to analyse what your competitors are charging for similar products and services.
If you change your prices, be sure that it is clear to customers, especially those who have bought from you before. This will enable you to explain the price rise to them without alienating them.
Increase sales
Sales drive profitability. So, it makes sense that increasing your sales can help you to increase profit, providing you have the right pricing model.
Use marketing and sales strategies to increase your sales, including incentivising your sales team, promoting your business to new leads or building brand awareness. Understanding who you want to target and the platforms they are present on will help you refine your efforts and gain customers more effectively.
Similarly, you should employ customer retention tactics (such as support and exclusive offers) to ensure your existing customers return. This will help you to increase the lifetime value you receive per customer and grow your sales base. It also costs less to retain customers than obtain new ones, which helps them contribute to your profitability.
Ensure that any tactics you implement are cost-effective, as they will enable you to attract new customers while still being able to generate a profit off those sales rather than just increasing your costs.
Explore new markets
If you are already performing well in your current target market but need a sales and profit boost, it could be time for your business to explore new markets. This is especially beneficial for a brand with a good market share and is struggling to attract new customers.
Look at who you are targeting and ask if your value proposition could help any other audiences. Think about any potential market gaps in your industry and ask what you could do to fill that gap. This could include providing new services or products or adapting your existing offering to meet different needs.
By diversifying your target market and capturing new audiences, you can expand your customer base and sales. Even if it requires some work to get to this point, it can still spell long-term profit for your business, provided you utilise a cost-effective and considered strategy.
Improve productivity
We’ve already mentioned that lowering costs is one factor in improving profitability. Boosting productivity can be fundamental in reducing costs whilst still enabling you to reach maximum quality and profit.
Make sure your processes are efficient, including operating cost-effectively and meeting the expectations of your customers. If any function isn’t working well, it could result in lost time and wasted costs, which harm your bottom line.
Another aspect of productivity is motivating your staff to do their jobs well. This means ensuring they have the appropriate training, communicate your objectives with them and encouraging them to strive for excellence. Doing so will improve satisfaction (reducing staff turnaround) while empowering them to work to their full ability.
By improving productivity, you can ensure that processes happen faster and more is achieved in the same period. It can also enhance quality across your business, attracting and retaining customers better. All of this will have favourable impacts on your profit while managing costs.
Conclusion
Profit is undoubtedly an essential part of any business. While breaking even is a significant milestone, after this point, profit will become vital in allowing you to pay yourself, facilitate salary increases, enable growth, and create reserves should your business fall into challenging circumstances.
With the potential good that can be achieved through your profitability, it’s crucial to maximise it. By reducing costs, utilising an appropriate pricing model, boosting productivity and increasing your customer base, you should see your profit rise. Of course, it is essential to continually revisit your profit over time so you can continue to implement the necessary measures to improve it.
If you need support in enhancing profitability for your venture, we can help. Our team of advisors can work with you to determine the best steps to take to grow revenue and profit. We can also help you understand the role external finance can take in facilitating your profit-driving activity.
If you’re already generating a profit, we can also discuss the best place to reinvest that capital to boost your success.