One theme that tends to remain a crux of any business strategy, no matter its size, is profitability. It keeps business owners up at night, and constantly needs to be evaluated against business operations to ensure maximization of profits.
However, proactive organizations often take profitability into their own hands, which is great but this must be strategic. By following a few simple steps, businesses can increase their profitability while still retaining a competitive edge.
1. Evaluate where & how your business is making the most money
A simple tip in theory, but harder in practice for many organizations. Following this step means you must leverage your resources in order to keep a laser focus and pinpoint exactly what makes your business profit, and the manner it is taking place in.
Following this step means that is absolutely essential to have a valued and trusted CPA who is able to provide counsel in this situation. They have a holistic perspective of your organization, since they know its internal structure and how it is viewed on the outside.
They will be your best resource in understanding what makes your business unique, and how to maintain that edge for maximum profitability.
2. Use these numbers to determine some financial KPIs for your business.
Identifying your profits and their biggest sources is the first step. The next step is to use these findings to determine and construct financial KPIs for your business.
These will be the yardstick against future profitability will be measured, so it is important that these are built thoughtfully and with long-term goals in mind.
Moreover, it is also important to create KPIs that are tailored for your individual needs. KPIs vary across industries, and what makes sense for one industry will not necessarily work for another. For example, revenue per employee may be great for a hair salon, but revenue per well might be ideal for an oil & gas company.
Work with your accountant to understand what metrics make the most sense for your business, and how to implement these on a large scale.
3. Structured monitoring
Now that your business has identified its profit channels, and set up metrics to measure progress, the next step is monitoring. Structured monitoring varies in organizations, so it can be anywhere from monthly to bi-monthly, or even quarterly depending on the size and operational capacity of the business.
Whichever frequency is picked, it is paramount that is adhered to. Reports need to be generated according to it, and must be analyzed with your financial team.
The metrics that are set up are only helpful if they are monitored with enough frequency to ascertain if they are actually beneficial or not.
4. Communication is key
All of the aforementioned steps will only generate profitability if there is ample communication between teams. The organization needs to understand the financial goals of the business, what the long-term goals are and where growth is needed.
This means that each department, such as sales and marketing need to be in the loop. Furthermore, they should also feel comfortable providing feedback and observations on gaps in the business and what limitations they have.
If your revenue per employee is down, is it because there’s not enough work coming in from new business? Or is it because your employees are taking longer to do the same amount of work? These are just some of the questions that must be examined in order to build a successful profit strategy.
To achieve this, gather managers and probe to find the answers. If problems are presented, work with departments to resolve them in a timely fashion. Otherwise, simple problems may become large headaches down the line, and big losses tend to occur.
Maximum profitability may seem elusive to many, but following these steps brings businesses that much closer to attaining it. Building a business that remains profitable over a long time period is not easy, but these steps will bring you that much closer to it.
To learn more on how businesses can be profitable in 2017, please do not hesitate to contact us.