Dave JonesBusiness Matters, Finance for Non-Financial Managers0 Comments

What is profitability?

There are many ways to explain and understand profitability. It tells you if you made or lost money on business processes. It provides a picture of your earnings and what you spend to achieve those earnings. It tells you if your total revenue exceeds your total expenses. Put simply, profitability is your bottom line. Any number of measures or factors can improve your profitability such as reducing costs or improving productivity or developing new products and services. Moreover focussing on profitability need not compromise cash flow if measures taken are thought through.

Tips to improve your profitability

  • Stay focussed on your strategic objectives.
  • Emphasise to employees the importance of profitability.
  • Understand what drives profitability and use KPIs (key performance indicators) to assess and monitor it.
  • Don’t get involved in activities that do not contribute to your objectives.
  • Plan using accurate and detailed information.
  • Involve stakeholders in the planning and decision making process.
  • Ensure targets are smart and properly budgeted.
  • Monitor the effectiveness of plans and then review results.
  • Act upon lessons learned and factor likely changes into plans and modify strategy accordingly.
  • Benchmark your business against others and other parts of your own business.
  • Streamline administration and production processes where possible.
  • Reduce costs through efficient buying, choosing the right supplier, comparing suppliers regularly.
  • Minimise wastage not only of stock but of systems and employee time. See our tips on stock control.
  • Ensure your finance facilities continue to be competitive.
  • Review regularly and cut overheads such as insurance and energy bills.
  • Manage assets efficiently by selling unnecessary ones and leasing out those you use periodically.
  • Communicate with all stakeholders using a range of efficient strategies.
  • Instil in employees the importance of maximising the value and not just the volume of sales.
  • Analyse your customer base regularly.
  • Monitor any discounts offered to customers on a regular basis.
  • Centre efforts around the most profitable customers and consider selling them premium, complementary or new products.
  • Find new customers who are similar to your existing top customers.
  • Favour cheaper techniques like networking instead of paid advertising wherever possible to increase sales volume.
  • Focus on profitable products by improving the product mix.
  • Review pricing policies periodically to take account of economic changes.
  • Raise prices selectively or overall but try to trial price changes.
  • Analyse your markets, stick with profitable ones and consider going into news ones.
  • Ensure that the cost of extra sales people or of going into new markets is balanced by extra profit and not just extra revenue.
  • Run an efficient recruitment policy; use subcontractors during busy times.
  • Initiate training policies that bring and keep managers and employees up to the latest standards.
  • Reduce staff workload and labour costs through technology.
  • Assess how you can reduce expenses you pay out for employees.

Profit Margin Widget

Click on the image below to open our interactive profit margin flowchart widget.

Adjust the values for sales price, cost price, volume and fixed costs and dynamically see the impact on your own profit margin %.

Profit Margin Widget

Profit Margin Takeaway Infographic

Click on the button below to view our Profit Margin Takeaway Infographic

View an example

Finance for Non-Financial Managers eLearning

Let us help you improve your own profitability with our off-the-shelf and customisable Finance for Non-Financial Managers elearning.

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