Being profitable is one of the main success measurements for every business. Global crises and the pandemic in 2020 have shown us that even some of the biggest companies with high cash flow were going out of business due to low-profit margins.
As per Forbes Magazine (2018), 80% of start-up businesses go out of business in their 1st year, and for one main reason; not enough profit to meet the expenses and pay back investors. Looking at this data, every start-up should focus on building strategies on how to become profitable and in what time frame.
Many big companies with high cash flow and annual revenue have a small profit margin or are not profitable at all. When looking at the company’s revenue numbers, as a consultant, I am never impressed by the high sales, but rather looking at how much of that revenue is actually kept.
So, what are some steps that companies can take to avoid going out of business? Firstly, businesses should calculate their Wealth Ratio to understand how long they can stay in business in case of no revenue. This will show a clear picture of how is their business positioned and how much action they should take and how fast.
Here are 5 things every company can implement to increase profit:
1. Look for hidden costs
Hidden costs are present in every company however they are often overlooked. You would be surprised how many big and successful companies, keep on spending money on departments, technologies, or team members that don’t contribute to their growth, and they are doing so, only because they have enough money to cover it. Just because your company is profitable, it doesn’t mean you should be continuing losing money in those departments that don’t work. You might wonder, why would companies overlook these? The main reason is a lack of time from the top executives. They are focused on strategic growth and pleased with the results, so they simply don’t find this an important task to look at. However, if we calculate the compound effect of those hidden costs over the years, it will become clear to every executive how much additional profit this can save for the company and why is this important to look at.
2. Improve internal systems and processes
Business owners and CEOs often look for how to realize big ideas and scale fast. However, exponential growth in every business is actually achieved by small improvements and changes that will compound over time. Take the time to look at your existing systems and processes, and isolate them. After doing so, look at how each process can be quantified and improved. For example, what is the one thing you can improve in your purchase process? Or delivery of your products and services? What is one small change that your sales agents can do in their presentation? Can your front desk administration communicate with your prospects better? Can you implement a new technology to automate certain tasks that your team spends too much time on? Etc., but you got the idea. Small improvements in existing systems and processes increase performance results, sales conversions, and customer satisfaction. So, start paying attention to small things.
3. Open new divisions
Opening new divisions is a great way to increase the revenue stream and consequently your profit margin. Businesses need to look into their existing products and services and discover what other areas they can expand into, that makes perfect sense for their customer. This can be as simple as creating a service instead of only selling products; opening a man and kids department for your previously only women’s store, or introducing cross services to support your customers’ needs after they purchase your core offer. However, you need to be careful that your new divisions don’t end up costing you more than what your additional revenue can cover. In this case, a new division can bring in more depth and decrease your profit, which is the opposite of what we want.
4. Tap into new markets
Expanding your business in new markets, geographical and technological can bring in additional profit in a short period of time. The simplest way of doing that is by using the online market to expand globally. How can you reach more clients worldwide or ship your products to different countries? Can you open your offices in different cities, countries, and continents? However, I would like to emphasize that it is crucial that businesses first create clear systems, processes, and procedures before expanding into new markets. Otherwise, this expansion can shut down your business instead of growing it.
5. Invest into Sales Training and Business Consultancy
Research shows that sales training increases a company’s sales by at least 28%. So, are you allocating a budget for your sales training, or you are just hiring people that “are good in sales”? Working with many companies and speaking to many CEOs in the UAE, but also globally, I found that majority never invest in sales training, which is a paradox because every company is looking to increase its sales. The good news is, that sales are a SKILL, which means people can be trained and taught how to sell. Furthermore, you want to consider hiring a consultant that will focus on improving your company’s conditions. Having an external person to look into your processes, systems, and problems brings in a fresh perspective and new solutions. A consultant can either be a facilitator or also bring in the intellectual property that can be used in your company.
Increasing profit is a must for every business in order to survive. However, increasing profit doesn’t have to be done to simply keep business going. Higher profit can also mean higher impact, and every CEO should strategically think about what can be done with it. Will your company support certain NGO organizations, and charities or maybe invest that additional profit into further business expansion or team bonuses? In any case, more profit benefits companies in multiple ways, while at the same time thriving companies are one of the pillars of the economy, so your business growth will benefit citizens as well.
Nevena Bazalac, L.A.K.E Consulting