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The primary goal of all business ventures is to attain profitability because without it, no business can survive. Even during the best economic circumstances, a positive earnings sheet is a top priority. Therefore, it is important to measure things that made a business profitable in the past, what seems to be working currently and what future projections show.

Reasons to Compute Profitability

Whether your goal is to record past periods of profitability or make future projections, computing profitability is the most important measurement for your business’ success. No profits means your business will not survive. Conversely, high profits survives and rewards stockholders with significant returns.

As an important task for your business, managers should continuously look for ways to increase profitability. This agile way of thinking will prevent stagnation and reliance on one avenue of success. The winds of business dynamics are constantly changing and you want to remain current with the trends.

Parallel these trends with making changes in your business through partial budgeting. This allows you to test on paper what a small or incremental change could mean for the business. Do this before making a full-fledged effort to change.

“Uncertainty” gained prominence during the Great Recession and is still the business buzzword. However, the gloom and doom expectations are sprinkled with success stories of businesses boosting their profitability. Your business can be part of this air of optimism.

Begin by making strategic decisions that will carry your business through tough economic times. Continue with smart solutions that will have a positive impact on profitability for many years to come. Here are 12 cost-effective tactics that could help you save more money and boost profitability.

  1. Outsource where possible. The more you are able to outsource without disrupting normal business flow, the more you can save to reinvest in the business. For every function you can outsource, you are not paying maintenance costs for health insurance, employment taxes and other benefits. Another sign of the economic downturn is the increase in freelance workers. Many popular tasks including bookkeeping, payroll administration, telemarketing and legal services are available on the open freelance market.
  2. Hire an efficiency expert. An efficiency expert will work with you to cut unnecessary spending. They take a surgical look at where your business income is going. Everything from the number of boxes of staples to freight and telecommunication services is on the table. With your permission, they will either negotiate better deals or find better suppliers with better prices. What is good about these experts is if you do not save money, they do not get paid.
  3. Review ledger each month. You might not consider the ledger the most compelling thing to read, but the story it tells is important. This is a clear picture of your business’s financial health. Your ledger raises questions and prompts action based on what is read. Fixed assets, liabilities, revenues, expenses and every financial thing about your business is where you can discover excess.
  4. Control expenses. Of course, the purpose of reviewing the ledger is to look for ways to control expenses. What an efficiency expert cannot do, this added step can in bringing your business into a stronger profitable position. For every dollar you can save, you automatically gain an extra dollar in profits. In essence, you boost business profitability without buying raw materials to produce a new product. The money is there, hiding under the cushion of excess.
  5. Focus on unique offerings. Business survival also depends on whether the widgets you sell are better than your competitor’s widgets. If everyone decides to sell widgets, you need to focus on products that are unique and needed by your customer base. Further, if you sell a thousand different types of widgets, you will do better to develop efforts and target sales on products that give your business a competitive edge. In a matter of time, you will see a rebirth of your company and possibly double your profit margin.
  6. Look for export opportunities. Globalization is no longer a buzzword – it is a way of business life. To survive, you should look for opportunities beyond your current borders. Tremendous business opportunities have opened up for more businesses to compete on the global stage. Sales growth is happening abroad. You can take advantage of NAFTA and other trade agreements to expand your products in other countries. Attend trade shows and talk to your current network of suppliers to seek out international opportunities.
  7. Use add-on sales. Whenever a customer buys something, suggest a complementary item that enhances the original purchase value. For instance, if you own a women’s clothing store, suggest a bracelet or belt to accessorize the dress a customer bought. By using add-on sales, you can increase revenues without additional marketing efforts.
  8. Increase profit margins. Your margin is the difference between what you paid to attain the product and the sale price that you want customers to pay. You can increase your margins in one of three ways: raise the purchase price, lower the costs of goods or a combination of both.

    Being reluctant to raise prices is understandable when you want to make customers happy. You should also want to make quality customers happy and avoid getting stuck with dead beat ones. More on that in number 11 on this list. Keep in mind that most customers will tolerate price increases when the amount is competitive with other retailers.
  9. Get rid of unprofitable products and/or services. Many businesses keep selling products and/or services that do not return a profit. You could make the most beautiful widget in the world. However, if the cost of producing such beauty is never recouped with a high sales volume, you are carrying a money losing item. Get rid of it or close your business. It is much easier to tell your employees that you will stop making an unprofitable product than to tell them the business is closing.
  10. Target new customers. If time is money, then allocating time to target new customers will earn money. Advice to spend the least amount of time on business activities that do not bring money into the coffers is a no-brainer. Seeking customers within established groups is a way to improve operating efficiencies for seeking new customers.

    Cast a smaller net into a geographic area where you have had the most success. You do have a choice between exhausting efforts to span the globe with a random net and narrowing your search. Globalization does not mean your business must travel to the four corners of the earth to find customers. Develop targeted strategies to find quality customers and all the rest will find you.

    Another way to target customers within groups is to leverage your time in specific industries. While seeking new customers, you can also build a reputation as an industry expert. As a result, you will begin to see an increase in service rates and industry referrals.
  11. Deal with deadbeat customers. Yes, every business has them at one time or another, but you can outsmart them at every turn. Basically, there are two types of customers that do not want in your database. The slow payer and the no payer are two customers that will quickly drain your profit margins. Realistically, not all customers will pay every bill on time. However, the longer you have to wait, the more you lose chasing the dollar: time, money and patience.

    A good way to take command of collection activities is to require a down payment. This is true for individual and business customers. Never buy supplies or begin work activities without receiving the down payment. This serves as a guarantee that the customer will pay the balance once all the work is completed.

    An imbalanced accounts receivable collection cycle can wreak havoc on your business income and destroy any hopes of profitability. Make sure that bills are accurate and include all the information customers need to make a payment. This way, any delays will not be the result of poor business management. Implement a consistent billing system that includes a policy for handling past due accounts.

    If you sell products, never accept a large order form first-time customers without some type of down payment. Or, you might require that new customers pay in full for the first order. Never underestimate the eagerness of some customers to place large orders with a company that is eager to make a sale.
  12. Maintain efficient inventory levels. A key factor to boosting your business profitability is maintaining inventory efficiency. Products that do not sell will sap your cash flow through storage space, insurance and other costs associated with handling them. Invest in an inventory management software system if you need help controlling stock levels. An efficient inventory stays in line with customer demand. The result is a positive cash flow.

Conclusion

Boosting your business profitability may also require evaluating current facilities. This will help to make sure you are getting the most out of the facilities. Additionally, you may find areas where you can streamline some processes. If buying new equipment is more cost-effective than using an antiquated system, determine the return on making such an investment.

Financial challenges are a normal process in business whether you are striving in the best or worst of times. At times, maximizing profits might feel like you are in a three-ring circus. Nevertheless, continue to do what works and get rid of what does not work.

Maintaining a high level of profitability may continue to follow your business lifecycles. Along the way, closely examine operating procedures, customer buying habits, expenses and anything that goes directly to the bottom line. You will discover new ways to increase revenue while simultaneously decrease expenses.