Having a solid understanding of profitability and margins is the bread and butter of any successful business. These financial metrics serve as vital signposts, guiding business owners toward informed decisions that can bolster their bottom line and ensure long-term success. So, let’s explore the fundamentals of profitability and margins, and unpack actionable strategies to boost your business’s success.
What is Profitability?
Profitability is the ultimate litmus test of your business’ financial health. Simply put, it measures how much money your business makes after covering all expenses.
To calculate profitability, subtract your total expenses from your total revenue. A positive result signifies a profitable venture, while a negative one indicates potential trouble brewing.
What are Margins?
Margins, on the other hand, delve into the nitty-gritty of each transaction and offer insights into the efficiency of your business operations. Margins quantify the difference between the cost of producing goods or services, and the price at which they are sold. Essentially, margins quantify the profitability of individual sales.
To compute margins, deduct the cost of goods sold from the revenue generated by those goods. A higher margin, or difference between the cost and the revenue, indicates your business is retaining a larger portion of each sale as profit.
How to Calculate Profitability and Margins
Strategies for Improvement
Now that we’ve gone through the basics, let’s explore strategies you can use to enhance profitability and grow your margins.
5 Ways You Can Improve Profitability:
- Increase Sales Volume: Starting with low-hanging fruit, are there any upsell or cross-sell opportunities among existing clients? By finding ways to increase each customer’s spend, or each transaction value, this can be a quick win for profitability.
- Reduce Costs: Identify areas where costs can be trimmed, without compromising on the quality or your product and/or service.
- Increase Prices: Can you justify increasing your prices? Things you should ask on a recurring basis to ensure you have a profitable pricing structure include:
- How does your pricing stack up in comparison to competitors? Are you pricing too conservatively compared to the rest of your industry?
- Are you charging all customers the same price? If yes, should you be?
- Have you increased your prices to match supplier price rises?
- Improve Efficiency: You can streamline your operations to minimise waste and maximise productivity, subsequently improving profitability by lowering business costs. For example, when it comes to staff, check if there are areas of overlap or tasks that can be streamlined, consolidated or even automated.
- Expand into New Markets: You don’t want to put all your eggs in one basket, so explore untapped markets to diversify revenue streams, increase your customer base and improve your profitability.
5 Ways You Can Improve Margins:
- Reduce Cost of Goods Sold: Can you find ways to reduce the cost of producing your goods? For example, can you lower production cost by changing where you source your raw materials from, or are there more cost effective ways of acquiring your base materials and products?
- Increase Prices: Similarly to profitability, this comes down to regularly reviewing your pricing structure to ensure it captures the full value of your offerings.
- Improve Efficiency: Fine-tune workflows to minimise overheads and maximise profitability. As previously mentioned, are there ways tasks can be streamlined, consolidated or automated?
- Negotiate Better Supplier Deals: Get into the habit of re-evaluating your supplier deals, and don’t be afraid to negotiate a better deal — after all, the worst thing they could say is ‘no’.
- Reduce Overhead Costs: Scrutinise overhead expenses and identify opportunities for savings. For instance, you might try renewing necessary subscription fees at lower costs, or cut back on unused technology applications.
How We Can Help
Understanding profitability and margins is paramount for any business striving to thrive in today’s competitive landscape. At Hoffman Kelly, we’re not just advisors; we’re partners on your journey toward financial excellence. Let us guide you through the intricacies of profitability and margins, empowering you to make informed decisions and achieve your business goals.
Ready to elevate your financial game? Our expert team is here to answer your questions. Contact us today!
