Periodically analyze your business’s gross profit margin and operating margin and compare them to those of the best companies in your industry (or related industries). Benchmarking in this way can help you identify opportunities for improvement.
2. Analyze individual components
Review the profitability of various areas of your business such as individual products or services, business lines, individual jobs, geographic locations, clients, etc. This will allow you to zero in on winners and losers.
3. Examine your options
Consider what actions you could take to improve profits. Your options might include reducing costs, increasing prices or eliminating unprofitable products and clients. You should carry out a thorough assessment for each alternative including creating scenarios for possible outcomes.
4. Make a plan
Select the best options for improving your business’s profitability and devise a work plan for implementing your decisions.
5. Set targets and follow-up
Based on the options you have chosen, you should establish a schedule with ambitious, yet realistic, targets. You should then conduct a rigorous quarterly follow-up to make sure the plan is on track or implement corrective actions.
According to Henao, a key success factor for improving the profitability of a business is to ensure you are properly costing for all inputs into products or services. In many cases, entrepreneurs don’t have accurate costing systems, leading to wrong conclusions and bad decision-making.
As well, entrepreneurs should make sure they have a clear understanding of their value proposition to the market (why clients should buy from them). This will help them determine the best options for increasing profits.
For instance, a decision to eliminate an unprofitable product may lead to a loss of customers who want to get everything from a single supplier. Or, alternatively, a business might conclude a price increase is in order given the perceived value of its products over those offered by competitors.
“You have to determine what sets your company and its products apart from the rest,” Henao says. “It may be possible for you to raise your prices without negatively affecting profit.”