Critical Factors for Improving Profitability

A recent survey of our clients indicated that profit improvement was one of their top 3 priorities.  It is vital that business owners and managers understand the 2 drivers of profit, as well as the connection between profitability and cash flow.

Profitability is affected by sales and reducing costs. Within sales there are 3 critical areas: price, volume and customers. Each of these are connected and affect sales in different ways.

There are further ways to increase your profitability through fixed expenses, variable expenses and supplier management. Keep a look out for another blog that will be released over the next few weeks which covers this.

1. Price

To improve profitability and performance, price sets the scene. It will determine the volume of sales and ultimately attract different types of customers.

The most obvious part of profitability is the selling price. It is essential when determining the price to ensure that the price and sales volume allow the business to be profitable. It is therefore, good practice to also review these prices regularly.

There are many factors that you need to consider when setting prices. For example, the balance of pricing across the product range. You may have a loss-leader (this is a product that makes little or no profit), which can be offset by other profitable products. Pricing should also consider the level of competition and relative pricing – reflecting the position you wish to take in your market segment.

When offering a discount to a customer, always remember that the discount will increase sales volume, but it will also eat into the profitability of the products. You should record all discounts and review them regularly.

There are two ways in which you can monitor pricing: profit margin and mark up. These can be linked through to your pricing strategy. Monitoring both will allow you to make sure they are both in line with the pricing strategy and make changes when necessary.

• Always review your gross and net margins against previous periods
• Understand customer profitability for each customer and their behaviours
• Eliminate discounting if possible
• Implement and review a mark-up policy – this will ensure that you are in line with the policy
• Analyse sales on a regular basis.
• Use key financial indicators to identify any anomalies that may impact the sales price:
  • Cost of goods sold margin
  • Gross margin
  • Average stock turnover
  • Mark-up

2. Volume

There are two ways in which volume can be increase. The first is through increasing your current level of sales with your existing customers, and the other is sourcing new clients.

To increase sales to your current customers, you will need to implement a marketing strategy to entice more sales. Something that most businesses fail to see is the ability to up-sell to their existing customers. Making sure that all staff are trained in this area could be most beneficial for your business.

Selling targets are a way to monitor overall performance and enhance profitability. Therefore, I advise you to look at this carefully as it can have an impact on other areas of the business. Understanding your break-even point will allow for realistic targets to be set and ensure profit is maximised.

To help increase the volume:

• Understand the current customer buying patterns
• Implement a marketing strategy to increase sales volumes
• Introduce loyalty programs that encourage referrals
• Train staff to up sell and make sure they are aware of the high-profit products.
• Use break-even calculations to set sales targets
• Always research to see if there are other markets that the business can move into.

3. Customers

First and foremost, excellent customer service is imperative to keeping and winning new customers. Understanding their needs and wants is a simple step in improving the performance of the business.

Having a Customer Relationship Management system will enable you to keep a wide range of information about your customer and their behaviours. If the business needs to increase the selling power, utilising this tool is the first step.

• Understand the needs of the business customer and use this information to improve the customer service experience.
• Measure customer service levels, for example, there are many free tools such as Survey Monkey to gain these insights
• Reward current customer for their loyalty
• Consider using mystery shoppers to monitor customer service
• Have regular contact with your customers to make sure your business is front of mind.

In conclusion, each business has their own challenges when it comes to profitability, and this blog only touches on the surface of what can be achieved. If you have found this article valuable in understanding profitability and would like to learn more, then please reach out to us.

The CFO Centre has over 40 CFOs across Australia and NZ and over 1000 across the globe.  Our track record shows our ability to help our clients improve their profit.  If you want to book a 15 minute call with us to find out more, feel free to get in touch via 1300 447 740 or send us a contact form.