A business organization that produces and provides goods or services considers profit as the most important variable to measure its performance. The making and improvement of the profit are the primary goals of all type of business organization (other than non-profit organizations). The posts will elaborate 30 viable ways of improving profitability in small and medium sized businesses.
We will start with a question why is profit the most important factor? Because it provides a return on asset for the investors. An owner or shareholders or external investors will only be satisfied only if they receive a satisfactory level of output. That is why it became the utmost important goal for any business organization.
It really does not matter if it is a big company or not. Literally, every company is required to make healthy profit; or a minimum profit at least for its survival.
But the investors will not be attracted if a company only makes profit for surviving. It has to boost its profit by increasing the sales. For this reason, every company has to develop its strategies to increase profitability.
The profitability of a business can be found out by conducting financial ratio analysis. If profitability is low, a company must develop strategy to recover from the current position. Different ways can be applied to increasing profits in a company and make the business investment-worthy. Here I will explain 30 ways to improve profitability in small business organization. You may find it effective.
Increase Sale Volume and Reduce Costs
Mainly, a company can maximize its profit by following two major ways. One is by increasing sales. Another one is by reducing costs. When it increases sale volume, the revenue goes up and as a result, profit goes up if cost remains unchanged. Conversely, when a company reduces its operating cost or raw material cost, the profit goes up if sale remains unchanged.
So, profit increases when the gap between sales/revenue and costs/expenses increases.
For the betterment of these two accounts, we have classified all the strategies into 30 parts. All of them are discussed in detail below. Some points are literally very important for you. Conversely, some are not maybe as important as it is to others.
30 Ways to Improve Profitability in Small Business
Employee Efficiency Improves Profit
Better Employee Efficiency
A direct effect to financial outcome increment is recruiting skilled, expert, and adroit employees. If expert employees are hired, you are ensuring an increase in wealth in the first level.
Periodical Training
But what to do with existing employees? How can you increase their productivity? By conducting periodical training to the existing employees, you can improve their productivity skills for profit maximization.
Utilization of Leadership Skills for a Better Growth
Become a Great Leader
Importance of leadership in management is undeniable. Try to become a great leader rather than a manager. A great leader understands and accepts all of his responsibilities and do his/her work properly. They do create great plans, moderate business operations efficiently, and motivate their employees to achieve organizational goals. As a result, the organization sees an increase in the profit margin.
Goal Oriented Leader
Be a goal-oriented leader. Set specific goals, start working on those goals, moderate them, and finish the required task in time. By doing this, every resource including time will be utilized properly. This results in profit improvement.
Prepare a Great plan for a Better Profitability
A plan is the life of a business organization. But how does it maximize profit effectively? When you plan, you fix your future course of actions. So, you know what you are going to do in future. This minimizes uncertainty.
When you predict a future event or course of actions, you know what your expenses are. By that, uncertain expense reduces.
Efficient Management Team
An efficient management team has direct control over the resources. They allocate resources wisely and evaluate the operations periodically. As a result, the efficient utilization of resources is ensured. Therefore, cost minimization process is done. So, an efficient management team can reduce the cost of production very effectively.
Maintain and Improve Long-Lasting Relationship with Customers
Customers are the lives of any business organization. Maintaining good customer relationship can result to an increase in sale. So, the good customer relationship is mandatory for every organization to increase profit.
Motivating Employees
A motivated employee works better than a demotivated one. When employees are motivated, they work with dedication. As a result, the productivity goes up, and it results high production of goods and services.
Employee Incentives
Allowing employee financial or non-financial incentive is a tool to motivate employee. This results in high productivity. For example, a seller who sells your product will be motivated to make more sales. It will result in increasing profit.
Giving a Reward for Achieving Specific Goals
It’s another tool for motivating employees. When you specify a goal for an employee or for a team and allocate reward for accomplishing that goal, employees feel motivated and finish the task or goal within due time. It is another way of increasing productivity.
Improvement of Product is One of the most 30 Ways to Increase Profit in Small Business
Offer Unique Product
A unique type of product can satisfy a unique type of demand and therefore, can create monopoly market. As there is no substitute product, you can have huge gross sales. In a result, it increases net profit.
Offer Demand-able Product
A demandable product is always on sale. For example, rice or medicine which satisfy basic needs and always demandable. Find out those type of products and produce those to stabilize or increase your profit.
Offer Quality Product
Quality product is related to customer satisfaction. When you offer a quality product at a comparatively low price, the sale will increase in near future for sure.
Reduce Defects
Defects in product increase waste; therefore, it increases expanses. Quality controlling approach can be conducted to reduce the number defects. It enormously reduces production cost.
Marketing and Advertisement Increase Profitability
Develop a Great Marketing Plan
Marketing strategy is conducting market research, knowing the market demand, and producing accordingly. So, developing a great market plan will ensure correct market demand. It will allow you employ resource efficiently, reduce cost, and make sales which will result in increasing profit at last.
Promote the Products
When you produce a product but most of the people do not know about your product, the sale will be very slow. So, the effective promotional campaign will increase your sales.
Reduce Promotional Cost to Improve Profit Margin
Observe if there is any ineffective promotional campaign. If there is any, terminate that campaign. It will reduce your costs.
Offer “After-Sale Service” and Perform it
After-sale service will allow you to build a personal relationship with customers, and will increase customer satisfaction. The customer will remember your goodwill and you will be able to sell repeatedly in future.
Market Selection and Measurement help to Increase Profit
Select Less Competitive Market
A less competitive market preserve very much potentiality to increase profit in future. You need not do very strong promotional activities. A demandable will do a lot of things. Also, entry barrier is very low. It will keep your cost very low.
Measure the Bargaining Power of the Suppliers
The bargaining power of supplier means how much power a supplier has on controlling the price of raw materials. The raw cost depends on the bargaining power of suppliers. If the bargaining power is high, you will have to buy raw materials at higher cost. But if the bargaining power is low, you can buy at low cost. And therefore, it will reduce the cost of production.
Measure the Bargaining Power of Customers
The bargaining power of customer means how much control the customers or buyers of a product have on its price. The price depends on the bargaining power of the customers. If bargain power is high, you will not be able to sell at high price. If it is low, you can easily increase the price and make more profit.
Cost Optimization Strategies to Make Better Profit
Low Raw Material Cost
Lowering the cost of raw material will increase the gap between the cost of production and revenue. It will result in high profit. Sometimes, a large number of raw material purchase will give you low-cost offer. Sometimes, you will find a discount. Also, if you can forecast future price change, you can purchase raw material at low cost in advance.
Target Lower Labor Cost
One for the major costs is related to labor cost. If you can decrease this cost, the production cost will be reduced. But do not hire inefficient labor at lower cost. It will surely harm the optimal productivity.
Forecast Future Price Change in Raw Materials
Forecasting future price change of raw material will give you an extra edge over others. You can purchase in advance if there is any possibility of a price hike. But still, this strategy includes some risk. What will you do if the price decreases instead of increasing?
Reduce Break-Even Point
Conduct a break-even analysis and reduce it. You can simply reduce the break-even point by reducing cost. It will also increase your profit.
Example: Suppose, to produce a product XYZ, the existing fixed cost is 5000, variable cost per unit is 200, and the sale price is 300.
Now, the BEP is, 5000/300-200 = 50 units
But, if you reduce the variable cost to 150, new BEP is, 5000/300-150 = 33.33
So, it reduces the Break-even point in the number of units (50-33.33 = 16.66).
Raise the Price
Sometimes, you can raise the price if there is increasing demand in the market. It will increase the gap between the sale price and cost that may result in profitability improvement.
Review Cost Structure
Always try to review your cost structure of your production. If you find any imbalance in any operation, change it to the optimal level.
Investment Strategies Boosts Business Profitability
Invite More Investors
More investment will expand the company to a bigger extent. It will increase the production capability. So, you can invite more investor to your business organization.
Reinvest the Profit
Net profit is divided into two parts. One is for the investors, and another is for reinvestment which is also called retained earnings. If you reinvest your profit, you will be able to utilize more assets, and your production capacity will go up as well. It will maximize your profit.
Make Some Loans
Though it may increase the financial risk, still it is a source of capital. You can borrow money from your friends or family and expand your business to a bigger one.
In Conclusion
We have elaborated the several ways to increase profitability in small business in thirty basic points. Actually, polishing profit margin is one of the crucial job a company wants to practice frequently. These points can help to earn better profit. If a business does not make a lucrative profit, it may become shut within a short period. So, every company has to develop strategies to boost the profitability in long-run. However, sometimes, achieving profit growth may be the most difficult job. For example, if an industry is in the saturation stage, profit maximization is very hard. For this reason, a company must develop growth strategies before reaching the crucial stage.
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Sheikh Faizul Haque is an internet entrepreneur and the founder of The Strategy Watch; Graduated from North South University with a double major in Accounting & Finance in Bangladesh.
With a strong interest in developing and improving Business Strategy and to Conduct Business Analysis.