Profit the foremost purpose of any business venture. A company is set up or an investment is made with the key aim of generating profits out of operations. The invested material and non-material resources must be utilized so as to earn enough to cover up the cost and generate an additional mark up. The key issue than that confronts the leader or the owner is: How to improve sales profitability?
To find out the ways to increase sales profitability, let us start by analysis the profit equation.
Profit = Earnings – Cost.
In order to increase the sales profitability aim must be to either increase earnings, (keeping cost constant), or by decreasing cost, (keeping earnings constant), or by increasing earnings and decreasing cost simultaneously.
The three alternatives must be taken in greater detail to list down the exact mantras to increase sales profitability.
1. Increase Earnings (Keeping Cost Constant) – Earnings can be increased by either increasing your prices and there by increasing margins or by increasing sales while keeping the associated cost / unit as constant. The prices can be reviewed once or twice a year, but the increase must be in range with the competition. Another important criterion to be kept in mind before revising prices is the nature of product and / or service sold. There are categories wherein customers are loyal and are willing to pay the little additional for the quality and taste like the food industry , however in some categories like telecom, even a slight increase might lead to a loss of client base thereby negatively affecting the margins.
2. Decreasing Costs (Keeping earnings constant) – The second alternative is to decrease the overall cost. This can be achieved by working out the cost backwards. Introduction of latest IT resources can effectively increase the long run expenses. Another important tool to reduce the associated cost is by imparting the latest management tools like synergy in the overall operations. Study the operational cycle carefully to check for any flows and remove the redundancy factors. For instance in various firm’ sloppy management leads to slow productivity thereby increasing cost. However be sure that the cost reduction attempts do not deteriorate the quality of products or offerings.
3. Increasing Earnings and Decreasing Costs Simultaneously – This can be achieved by the way of mass production. The principle of economies of scale can render the sought advantage. The only implication is higher initial cost in terms of marketing and machinery investment, etc but the overall cost is bound to witness a decrease.
In addition to the mentioned, another important factor that clearly dictates the overall profitability is the company’s strategy and communication. Inappropriate goal definition or vague strategy alignment can never end up generating profits. To achieve the desired success story be careful during the planning stages. Additionally ensure that your internal and external customers are bound by an effective communication channel and recprocate towards the increase in profitability.
Alexander Gordon is a writer for http://www.smallbusinessconsulting.com - The Small Business Consulting Community. Sign-up for the free success steps newsletter and get our booklet valued at $24.95 for free as a special bonus. The newsletter provides daily strategies on starting and significantly growing a business.
Business Owners all across the country are joining “The Community of Small Business Owners” to receive and provide strategies, insight, tips, support and more on starting, managing, growing, and selling their businesses. As a member, you will have access to true Millionaire Business Owners who will provide strategies and tips from their real-life experiences.
Leave A Reply