Improving profitability is one of the most effective ways to attract investors, and set a foundation for sustainable growth, and, ultimately, increase your business’s value. If you are interested in understanding more about how to determine your business value, What’s My Business Worth? Business Valuation Approaches might be a good place to start.
While revenue growth is important, it’s not just about making more sales—it’s about maximising the efficiency and effectiveness of every dollar earned. From streamlining operations to optimising pricing and reducing overhead costs, there are strategic approaches that can significantly boost profitability.
Here, we’ll explore key strategies that not only improve your bottom line but also enhance your business’s long-term market value, positioning you for greater success.
- Establish a Financial Baseline
Step one to improve profitability is to understand where the business sits first in terms of revenue, expenses, profit, value with accurate financial reporting and specialist guidance. S0, start with a clear understanding of your current financial position. What is your business value now? What is profitability based on? What is your profitability now and what was it a year ago?
Before we move forward, let’s consider a very simplified example that your current profitability is 10% on $5 million revenue and your business value is circa $1 million.
- Set a Clear Goal
Step two is to determine your end goal. Essentially, understanding:
a) What valuation are you wanting to achieve?
b) What is the profitability required to get you there?
c) What is your timeframe?
Using the example mentioned above, you want to go from a $1 million to $1.5 million valuation. To reach that, profitability will need to be improved to 15% while maintaining or increasing the revenue. Let’s discuss how we get your business from A to B.
- Identify Profitability Drivers
Evaluate core key areas (or speak to someone who understands them for your business):
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- Revenue: Assess revenue streams and explore ways to optimise them. Here are a few questions to guide you through this process:
- What’s your revenue now?
- What is the capacity for growth?
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- How can it be increased? Worth considering if is it a matter of simply raising prices or would your business benefit more from upselling complementary services or increasing basket size per customer?
- Direct Costs: Ensure all direct costs are accurately reflected and margins are set appropriately on products and services. For example, construction businesses often have high direct costs, including materials, labour, and subcontracting expenses. In manufacturing, direct costs vary based on raw materials and production labour.
- Overheads: What is driving your overheads and what is the breakeven point for my business? It’s worth noting that the goal of examining overheads and identifying cost efficiencies is an exercise on understanding business essentials and value-adds, as cutting the cost is not always the right strategy. For example, does business have too many cars which have high private use? If so, these are not necessarily adding value to the company, and essentially increasing expenses and decreasing profitability.
- Director Wages: A common misconception in business valuation is that if directors or owners don’t pay themselves a salary, it will make the business appear more profitable and therefore increase its value.
Whether the directors pay themselves or not, an adjustment is made to reflect a fair market wage, so it won’t improve perceived profitability. Therefore, it’s often more sensible to take your cash in salary, as it doesn’t change the valuation outcome and ensures directors receive their due compensation.
Take Control of Your Business’s Value
Increasing profitability is not just about driving immediate gains; it’s a strategy to maximise your business’s long-term value. Implementing strategies to improve your bottom line enhances both your business’s worth and long-term success.
Don’t leave your business value to chance, take its worth in your own hands. Book a free consultation with us and begin building a more valuable future for your business.
By Hoffman Kelly Director Elena Lenda