Profitability is still the primary goal for most small- to mid-sized businesses (SMBs). Without it, any sized business will struggle to survive in the long run. This is why improving profitability by careful monitoring and planning for the future should be a key strategy for any company. If financial benchmarks and profit margins don’t exactly excite you, you’re not alone, but being well-informed financially can make all the difference, especially in competitive industries.
What Exactly is Profitability?
As profit is the amount of money remaining after all the expenses of running the business are paid, profitability – put simply – is the ability of a business to earn a profit. Technically, profitability is the ratio of profit to revenue. This is important, as in times of growth or decline, you can get the wrong impression if you only look at the profit figure; looking at the profit as a percentage of revenue is more meaningful. It’s then a case of figuring out how you can improve profitability.
Why is Profitability Important?
Anyone in the financial services industry will tell you that if your company isn’t financially robust, it won’t survive long enough to expand. To achieve long-term profitability, you need clear financial goals, you need to avoid waste, and you need strong measurement systems in place.
A profitable business means customers can receive value for money, employees can get a fair wage, and the owners of the company can make a good return on their investment. Without profitability, you cannot develop new products or services, hire additional staff, spend more on marketing, or penetrate new markets.
How SMBs Can Improve Profitability
Whether you own a medium sized or small business, making it more profitable involves finding ways to increase sales revenue and decrease overall costs.
Strategies to increase revenue:
• Use market research to find alternative channels to attract new customers
• Check that your goods and services are priced correctly within your market and,
when appropriate, increase your prices
• Consider temporary price discounts to attract new customers or better yet,
temporarily offer more of your product or service for the same price
• Offer employees incentives for coming up with new ideas to increase profit margins
• Use technology to streamline schedules and procedures
• Develop ongoing training programs for employees to maximize productivity
• Use social media to boost brand awareness and attract potential customers
• Focus on customer retention with outstanding customer service and special offers
• Stand out from the competition with unique and high quality products that can
demand a higher price
Strategies to decrease costs:
• Decrease the inventory with more efficient stock control
• Negotiate prices with vendors and suppliers
• Minimize waste and errors in your business by training staff correctly
• Reduce marketing costs with Internet marketing strategies, such as strategic pay-
per-click ads
• Minimize overhead by switching utilities/telecommunications suppliers
• Use financial benchmarks to ensure your costs and pricing are in line with current
trends
• Use a financial consultant to manage and streamline your finances
• Only hire new employees when it’s absolutely necessary
• Outsource your accounting and administrative tasks to a third party
• Use more eco-friendly products and procedures
Using Financial Benchmarks to Increase Profitability
Benchmarking is useful to all SMBs for giving a clearer picture of general performance. Benchmarking data can help you see how much you earn, how much you spend on advertising, and the costs of hiring staff compared to your competitors. It will also highlight where improvements can be made. Among other things, financial benchmarks can show you:
• Where you are overspending on rental rates
• Where you are overspending on inventory costs
• How your income per employee compares to the industry average
Financial services and consulting firms can help you obtain benchmark data to compare your business’s profitability against other businesses in your industry. Many SMBs use benchmarking material such as RMA studies and Sageworks ProfitCents to gain useful financial information.
The Bottom Line
Ultimately, profitability is all about your bottom line – your revenues minus your expenses. Depending on the type of business you’re running, profitability is relative, but with any small or mid-sized business, if you commit to growth and manage your expenses carefully, you can develop a profitable business that has the strength to prosper.