How can one run a profitable business?
Except you are a philanthropist every entrepreneur sets up his/her business to make money by solving problems that is by adding value
More value yields more money. But, not every entrepreneur runs a profitable business. This brings us to these questions, 1) what is profitability and2) how can one run a profitable business?
What is profitability?
Profitability is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business activities. Profitability can be also be defined as the degree to which a business or activity yields profit or financial gain.
Profitability is one of four building blocks for analysing financial statements and company performance. The other three are efficiency, solvency, and market prospects. These key concepts are used to analyze how well a company is doing and the future potential it could have if operations were managed properly.
Then there are two key components of profitability, which are revenues and expenses. Revenues are related to the income of a business, that is the amount of money earned by selling products or services to customers, however, to generate income, businesses must use resources to produce these products and provide these services.
Resources, such as cash, to pay for expenses such as employee payroll, rent, utilities, or other components or items within the production or provision process. Being Profitability means that the relationship between the revenues and expenses is favourable that is the company is spending less to produce more and makes extra money than what was spent, the higher the margin between expense and income the more profit that company is making.
How can you run a profitable organisation?
Making your business more profitable involves looking at ways to increase sales revenue, margins and also reducing expenses and costs so that your business is making profits and also saving money at the same time.
1. Remove Unprofitable Products and Services
The products or services with the highest gross profit margin are the most important to your business.
Once you have identified your most profitable products or services you should concentrate on these. You will need to determine if the unprofitable products or services should be removed completely or reviewed for areas of improvement.
2. Identify the customers you want to serve
New customers can help grow your business. However, this can sometimes be the most expensive strategy for generating additional revenue. On average it costs eight times the amount of money to acquire a new customer than it does to retain a current customer.The simplest (and most cost-effective) way to get new customers is to offer incentives to your current customers and motivate them to initiate referrals for you. Word of mouth is one of the most powerful forms of advertising and a very important part of business growth.
3. Increase your Conversion Rate
Increasing sales conversion in your business is one of the fastest and lowest cost methods to boost your business profits. The organization should look for ways to always generate leads and ensure they convert these leads into profitable sales
4. Review Current Pricing Structure
Raising prices can be a terrifying prospect; however, a small increase in your prices can make a significant impact on your gross profit. Therefore, correct costing and structuring of your products and services are very important. You should review the costing of your products regularly and adjust your prices accordingly.
5. Reduce your inventory
Stock control is a good way to streamline your business and improve cash flow.Ordering more frequently allows you to compare prices and take advantage of seasonal clearance or overstock discounts.
6. Reduce your overall direct costs
Reducing your overall direct costs will have a significant impact on your gross margin.One way to reduce your direct costs is to negotiate better prices or discounts for everything you buy. Provided the quality is comparable finding the best prices may require finding a new supplier. Another way to reduce your direct costs is to eliminate unnecessary purchases. A thorough review of your direct costs should highlight any areas where overspending has occurred.
7. Reduce our overheads
For many businesses, overhead expenses have a way of creeping up over time. Regular review of your overhead expenses is a simple and effective way of improving your net profit. Benchmarking your business to similar businesses in your industry may highlight areas for improvement.
8. Management. Successful management is important for your business long-term growth and profitability. For example, poor management can lead to a decline in worker morale, which harms customer service and worker turnover.
In conclusion, all in all, the whole reason why you’re in business is to solve problems and to create value However that problems you solve and value that you create must attract value also – The more problems you solve or value you create the more money you make – the bigger the problem and the higher the value you create the bigger the money you make
So profitability is directly proportional to the problems solved and the value created for who and for how many people. Scarcity also drives up demand, which pushes up price and by implication profitability. Wake up to the reality of why you’re in business especially as it pertains to your shareholders – Deliver Profitability year in year out.
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