9 Strategies To Boost Your Business Profitability

The good path of a company is determined by the management of capital and the investments you make in each area or stage of business. Maintaining good practices, while constantly conducting internal and external analysis can make a big difference in the success of your company.

In this article we start from the basic definitions to arrive at a series of recommendations that you can take into account for the success of your business. Positively transform the course of your company and increase its profitability!

This term is often confused or used as a synonym for the concept of profit. Although both are accounting metrics to analyze the financial success of a company, they have differences:

Profitability of a company vs. earnings of a company

Profit is an absolute number determined by the amount of income, costs or expenses incurred by a company and appears in the income statement. It does not matter the size of the company (small, medium or large): they all want to make a profit.

And although profitability goes hand in hand with profit, the difference is that profitability is relative. It is used to determine the scope of profits in relation to the size of the company. Simply put: it is a measure of efficiency that determines the success or failure of an investment.

Another concept that is often used when talking about profitability is that of return on investment. Although a company can make a profit, it does not mean that the investments made were necessarily the most profitable.

Thus, an example of the profitability of a company could be the following: if a company had an investment of $ 70,000 and after a year it generated profits of 7,000, its profitability would have been 10%.

Don’t worry if you are not yet familiar with this formula. There are more to determine business profitability. In this article we have prepared everything you need to do it effectively.

In other words, the objective of any company is to generate profits, which are obtained when the income from sales exceeds the costs derived from the operations necessary to produce this income. This means that expenses must be deducted from what comes into the company from sales, so that your business can be sold.

Why is the profitability of a company relevant?

Profitability is the key to your company’s success. If you do not know the percentage of money or capital invested that you have earned or recovered, then you will not be able to know if the performance of this investment was good or bad. It also reflects the existence of earnings or, if not, it detects errors in a timely manner to boost its growth.

Profitability ratio projections allow you to establish how appropriate the use of capital was. That is why you should consider the value of the earnings you expect, compared to the operating expenses.

It’s all a matter of dividing the present value by the initial investment required. If the result is greater than one, it means that the project will be profitable beyond the breakeven point.

It is important that your company has the ability to adapt to changes that the market and trends may present. This is only possible through equity funds.

In general, profitability analyzes will allow your business to expand its profits and maintain it successfully in a dynamic and competitive market. If your company is growing, analysis is essential to identify opportunities.

As a decision maker, you need to rely on profitability analysis to have a more specific vision of your company and to know what are the elements or strategies that you must use to achieve adequate growth and avoid an increase in the investment cost.

The 5 elements of business profitability

These are the aspects you should examine in terms of business profitability:

1. Sales

Sales are the most important thing for any company and depend on time, demand and the consumer. These are maximized when a business has adequately measured the demand curve of its consumer base: if the stage it is going through is good, if it has great products to offer and is supported by attractive promotions to generate more sales.

The sales performance index measures profit. If the sales figures are high, your company may be prepared to face the challenges presented by market volatility or downturns in the economy.

2. Price

Pricing is essential to determine profit, so it is necessary that you implement a correct pricing strategy depending on the type of industry or sector, as well as the type of consumer. We recommend that you check the prices of the competition and determine which ones you should charge to increase your earnings.

ncias. In addition to this, it is important that you determine and check what are the prices that your customers would be willing to pay for your product.

3. Expenses

A profitable business has income that can exceed its expenses. These expenses can be the resources you spend on business or production processes, including advertising. It encompasses all aspects so that your product can be marketed. You can determine your earnings through an analysis in which you subtract your expenses from your total income.

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4. Permanence

Do you know how much it costs or will it cost you to stay in the business in which you operate? Return on equity shows the amount of profit a company makes on the money that shareholders invest. The return must be at least equal to the rate that a business can borrow money from its creditors to achieve the cost of staying in business.

If your company is profitable, but its return on equity is low, you probably still have profitability problems.

5. Profitability measurement

As we already mentioned, measuring the profitability of your company confirms its success. The income statement must show the breakdown of income and expenses for an entire business year. You can rely on profitability ratios, which analyze your financial health, through information on how profits were obtained in relation to sales, total assets and net worth.

Now that you know the 5 elements that make up business profitability, we will tell you some ways to calculate it.

How to calculate the profitability of your company (and know if it is really profitable). There are different ways to calculate the profitability of your business and here we show them so that you can determine which is the most appropriate for your current projects.

Profitability of a company

As we highlighted at the beginning, one of the ways to calculate the profitability of a company is through knowledge of the investment and the profit it has generated. It is made up of the profits generated or the differences between the sale price and the investment. The latter applies only if you sold the company.

So that you can calculate the profitability you only have to divide the profits by the value of what you want to analyze and multiply that result by 100 to express it in percentages.

1. If your company invested $ 100,000 and after a year generated a profit of 10,000, its profitability will have been 10%.

The formula we followed was: (10,000 / 100,000) x 100 = 10.

2. If your company made an investment of 20,000 and then it was sold for 30,000, its profitability would have been 50%.

The formula that was followed was: (30,000 – 20,000 / 20,000) x 100 = 50.

Profitability of a property

For this calculation you require the investment of the property and the profit it has generated. This is made up of the difference between the sale price and the capital gain (investment).

1. If a property had an investment of 30,000 and after a while it sells for 40,000, its profitability will be 33.3%.

The formula that was followed was: (40,000 – 30,000 / 30,000) x 100 = 33.3.

2. If what you want is to calculate the rental income, we can use this example: a property had an investment of 30,000, generated 12,000 of income and expenses in the same period amounted to 10,000. Thus, the profitability of the property is 6.7%.

The formula that was used was: (12,000 – 10,000 / 30,000) x 100 = 6.7.

To calculate a future profit you must know the average growth rate of the value of real estate in the area where you live or plan to rent.

Profitability of an investment project

If you are about to create a new company or are going to launch a new product on the market and want to know if it will be profitable, then consider your investment and future profit, which is made up of projected profits or profits.

1. If you invest 20,000 in launching a product and your projected earnings for one year are 3,000, then your profitability will be 15%.

The formula that was used was: (3,000 / 20,000) x 100 = 15.

For this type of project, it is essential that you verify other factors such as the risk that the product may have or its impact on customers, whether positive or negative.

Profitability of a share

Here you require the data of the investment of the stock and the profit it has generated, which is made up of the difference between the sale price and the purchase price and the dividends (if they were delivered).

1. If you buy shares worth 10,000, but after a year the shares go up in price and sell for 12,000 and pay a dividend of 500, the return will have been 25%.

The formula we used was: (12,000 – 10,000 + 500 / 10,000) x 100 = 25.

Similarly, you can consider previous rents, although stocks are more difficult to forecast due to their volatility in the market.

If you have already made these calculations and you consider that your company has profits, but you want to increase its profitability, start with these strategies.

How to improve the profitability of a company? 9 strategies

Manage your expenses
Optimize production and your inventory
Shop more efficiently
Raise the quality of your product
Concentrate your sales efforts
Expand your variety of products or services offered
Expand your market
Improve your marketing plan
Increase productivity

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1. Manage your expenses

When most companies carry out an in-depth analysis of their expenses, they usually find some elements that can reduce costs. Do not hesitate to do the same in your business. You must be careful: this reduction cannot jeopardize the quality of your product or service.

One area you could pay more attention to is your key cost areas, for example:

Suppliers: You may be able to negotiate a better price or even change it.

Finances: check if you are using any type of loan or overdraft. You never been

needless to check your financial facilities.

Facilities: companies often rent spaces that they don’t really make the most of. Ask yourself if there are ways to make the use of your facilities more efficient and a good option is to sublet a space that you do not use.

Production: make your processes more efficient with the help of proper production management. If your business is product-based, see if there is any way to take advantage of raw material waste.

At this point, a possible adaptation of the processes you carry out within your company also applies. Maybe use fewer man hours or resources.

An activity-based budget can help you determine actual expenses; that is, how much each process costs in the company, salaries or materials. This is one of the most complex processes, but certainly one of the most useful as well.

2. Optimize production and your inventory

Production lines tend to be expensive, which, fortunately, can be optimized. Some of the ways to do this are as follows:

Keep an analysis of the prices of the raw material and see if its cost increases over time.

Determine which products take the longest to sell and adjust your next orders to prevent further stagnation.

Avoid exceeding your investments in inventory.

Consider some specialized inventory management software that allows you to better manage warehouses, times and spaces.

Similarly, cross-selling strategies are also great options to take advantage of products that could be stagnant in your warehouse for a long time.

3. Shop more efficiently

Yes, it is somewhat complex to know the exact amount of products you should buy to avoid overspending. However, it makes sense to check your suppliers’ database to see if you can regularly buy the items at a lower price. But remember that this should not jeopardize the quality that you offer it.

Identify the area where you spend the most and get better deals with your suppliers. It does not hurt to consider other distributors, compare prices and get the possible arrangements such as price reduction or discounts for prepayment.

Another recommendation is not to have too many providers. While you may think that the more you have the better, the reality is that this action can be inefficient. Keep at least 5 or 6 suppliers to avoid that your company can be seen vulnerable by the lack of option.

4. Raise the quality of your product

Selling a product at a higher price to customers is possible as long as its quality is not only maintained, but also increased. Analyze which item or service generates the most income and optimize its quality. Create strategies to improve your reputation and emphasize your value. This, in addition to retaining current customers, can attract new ones. Making a product essential in the daily lives of users justifies its high price, since it is a premium item or really necessary for them.

5. Concentrate your sales efforts

The two key strategies for driving business profitability through sales are selling more to existing profitable customers and finding similar customers.

To achieve this, it is essential that you determine who your best customers are, what they buy and how often they do it. To make it easier, divide them into different categories:

High sales and high profits
High sales and low profits
Low sales and high profits
Low sales and low profits

While it may be obvious to focus on the first two groups, take advantage of other sales strategies to increase the profitability of the last two categories through nutrition as customers.

Similarly, do not rule out stopping doing business with consumers who generate low sales and low profits. In this way, you can have the opportunity to focus efforts on those that do provide benefits to your company.

Don’t skimp on expanding your customer base according to a profile similar to that of your most profitable customers.

6. Expand your variety of products or services offered

If it is within your means, increase the variety of products or services that you offer to your customers. Consumers like variety and if you complement their purchases, all the better. In addition, this makes you essential in their consumption, since you fully respond to their needs. This way you not only increase your sales and profitability, but you also build loyalty to your brand.

Don’t forget that customer service is essential and a great differentiator from your competitors. If there is one area in which you have to invest to ensure that you will always be providing quality service to users, it is customer service.

7. Expand your market

Just as it is a good idea to expand the variety of what your company offers, moving to new market areas can positively transform your business. If you choose this option we recommend that you take all possible precautions. While this expansion can increase your company’s profitability (with proper management), it can also be risky and costly.

Before heading to new horizons, research your options thoroughly until you find a potential opportunity. Ask yourself the following question: can I adapt existing products or services to new markets? If so, you will have entry to new income at a minimum price. Keep in mind that you always play in favor of increasing profits.

The idea is also that you understand as much as possible who your new potential customers are, what their needs are, when they are more likely to buy and under what strategies, in what way they buy their products, how long they take to make a decision, as well as how long they are willing to pay for a certain product or service.

Use social media to your advantage to research and obtain valuable information. Check very well the alternative opinions and comments of your customers and confirm what they are looking for.

8. Improve your marketing plan

Determine the highest value product among your most profitable customers and focus your advertising efforts on them. Nowadays having a stable presence on social networks is more than necessary to keep a company afloat. Therefore, optimize your appearance on Facebook, Twitter, Instagram or LinkedIn. You don’t need to create an account for all of these options. We recommend you check where your customers are. This way, you only have to focus on

the sites where they will see your ads.

Develop a social media strategy to capture the attention of your potential customers. Use valuable content to keep them informed about your products or services. If possible, develop special promotions or discounts in exchange for something. It can be by subscribing to your newsletter or by recommending someone else.

9. Increase productivity

All companies have areas where they can improve processes to increase their productivity. Do it with these points:

Measurement – Measure operational efficiency on an ongoing basis. After that, establish systems and processes that make the most of resources. For example, you can monitor the time use of your employees: how many hours do they invest in performing a certain task? If they invest a lot of time in a single task, it is advisable to detect it early to find the best solution and increase profitability.

Goal planning: create a plan of goals to achieve and share it with the rest of the teams. This will give them a better focus on their work times and will motivate them to reach their goals. Similarly, you can use incentives for workers to put in more effort. Just remember to define this aspect well to avoid affecting the quality of the product or service.

Streamlining processes: regularly stop to think and analyze if there are current processes that you can make more efficient. For these types of cases, benchmarking is a perfect option for comparing prices between similar companies or analyzing production and storage patterns.

These types of benchmarks can help you provide new ideas and drive more efficient business processes. Some factors that can help you determine this are the definition of the business areas you want to improve and the comparison with others. You can do it through research techniques with clients, employees or suppliers.

You can also thoroughly research your business processes and functions to calculate a potential improvement. Research the industries that have processes similar to yours and verify what they have done to make their processes more efficient, for example: the introduction of an intelligent management system.

The more information you collect, the better the comparisons you can make for the benefit of your company’s productivity.

While there is no magic formula for business profitability, we are sure that with these strategies you will be able to determine the business areas in which you should pay more attention.

9 strategies to boost your business