Increasing Profitability

1. The Main Chance

The best opportunities for increasing profitability vary from business to business.

1.1 For most businesses, the easiest way to increase profitability is to reduce costs (see 3).

• If you have a low gross profit margin, reducing direct costs dramatically increases the profit on each sale.
• Eliminating unnecessary overheads has an immediate impact on the bottom line.

1.2 For many businesses, the best way to improve profitability is to increase turnover (see 2).

• If you have a high gross profit margin, every sale is highly profitable. Once your turnover reaches the break even point, profits will increase rapidly.
• Reaching critical mass creates a virtuous circle. Acquiring new customers is made easier by your market presence and reputation, and unit costs are reduced through economies of scale.
• If your customers tend to be loyal, the value of each new customer lies not just in the immediate sale, but in future sales as well. The cost of selling to existing customers is almost always lower than the cost of acquiring new customers.
• Defending a high market share against competitors is easier than defending high profit margins.

1.3 Every business can increase profitability by reducing hidden costs (see 4).

• Small, young businesses and mature, stagnant businesses are particularly susceptible to hidden costs.

1.4 Every business can increase profitability by creating an appropriate framework. This will help you to:

• Focus on profitability (see 5).
• Make the most of your employees (see 6).
• Manage for continuous improvement (see 7).
• Increase or optimise prices.