“An investment in knowledge pays the best interest.” — Benjamin Franklin
Profit drives every business. However, there’s no formula for doing this because each business is different.
To maximize profits, a strategy based on a keen understanding of the financial landscape is key. Also crucial is finding the right accountant. Whether in-house or outsourced, they must have the expertise and vision to meet the organization’s goals.
While there’s no one-size-fits-all approach, here are some strategies a business can consider to maximize its profits.
What is Profitability?
Profitability is when a business makes more money (revenue) than it spends (expenses). Business expenses can be direct costs, such as costs of making an actual product or service, and indirect costs, or overhead, like rent, property taxes, marketing, and payroll.
A profit margin is how much money a business makes from selling its product or service. To work it out, subtract the indirect and direct costs from the price customers pay. So, if it costs Starbucks $1,00 to make a tall latte, but it costs $3,00 for a consumer to buy one, the profit margin is $2,00.
For an in-depth look into 9 Business Accounting Formulas You Need to Know, click here.
Why are Company Profits Important?
Profits are essential for a business to remain healthy and sustainable, and grow.
Making a profit allows businesses to compete within their industries, expand to other regions, buffer risks, and secure funding from investors.
If a business doesn’t make a profit at first, it’s not a reason to shut shop, however. Using financial strategies that are right for that enterprise can help increase profitability, eventually maximizing profits so that a business can ultimately thrive.
What Financial Strategies Can Improve Profitability
While there are many strategies out there, we consider these 8 key strategies essential for boosting profits, no matter the industry.
- Analyze Financial Statements
This is often the best place to start because financial statements provide data on how much the business makes versus its expenses. Data like balance sheets, and income and cash flow statements can be analyzed to see where to increase profits.
- Understand Your Margins
One of the key steps in maximizing profits, understanding margins helps a business decide how to charge for a product or service to make a profit. Just divide revenue by costs to calculate the margin.
- Assess and Reduce Operating Costs (OPEX)
Once you’ve got to grips with financial statements and margins, it’s important to look at operating costs, or overheads.
Overheads or indirect expenses are not directly related to production, so it’s often the first place to consider for cost reduction or cutting.
Making processes more efficient, taking advantage of tax breaks, or moving to a facility that offers cheaper rent are all ways to cut costs. However, any decisions must be carefully considered, as a cut will have an impact. For example, halving the marketing department could negatively impact sales.
- Review Your Product Portfolio and Pricing
Before adding a new product or service, look at what the business already offers. A review will reveal if an offering isn’t selling as well as it should, or if it’s time to discontinue products or services with the lowest margins (or increase prices).
- Do a Product/Service Pricing Review
It may seem obvious, but an easy way to boost profits is to increase the sales price of what the business offers. For example, if you sell 1,000 products for $5 more, you’ll get $5,000 more in profit, while expenses remain the same.
A caveat: before doing so, you must be certain that customers will be willing to pay an extra $5 (will they deem your offering ‘worth’ it?) otherwise, this will negatively impact the bottom line.
- Sell Off Old Inventory
Sometimes physical products don’t sell as well as expected. Instead of taking up precious warehouse space, sell it all off (and make a profit at the same time).
Do this via the likes of Amazon or eBay, discounts, or selling via factory outlets and reverse-logistics providers. Failing these options, donate the whole lot for a tax write-off, if it makes financial sense to do so.
- Focus on customer retention
Often it makes more financial sense to keep existing customers than to find new ones. To hold onto the ones you have, exceptional customer service and building solid relationships are key.
Loyalty programs, personalized promotions, quality products, and making the customer feel valued all help with this.
- Use KPIs and Benchmark Regularly
What gets measured gets managed, and setting up benchmarks and KPIs is essential to see where the business is versus where it needs to go. Reviewing KPIs regularly helps identify and address profitability snags before they become major problems.
Conclusion
Most businesses want to maximize profits but to do so, they need the right people to give the right advice.
That’s why many businesses now outsource their accounting function. Click here to learn about Lescault and Waldeman’s outsourced accounting services.
To read our article on Strategic Outsourcing: The When And How To Partner With Specialists, click here.
Another popular accounting solution is cloud-based software; click here to learn more about Sage Accounting Software.
