Increasing profits and decreasing costs are critical activities a business owner must focus on to create a sustainable business model. Essentially, profit is what’s left over after total costs (funds needed to operate the business) are deducted from total revenue. Ignoring the basics that drive profits into a company is a primary reason businesses fail.
There are two main types of profits: gross and net. Each one requires a thorough and consistent strategy. Gross profit is a total revenue minus cost of goods/sales, which include direct labor, materials and the portion of overhead costs that are linked to a product or service. Net profit is what is left after subtracting administrative and other expenses like rent, insurance, salaries, etc. from your gross profits.
Once a company begins to understand their gross and net profits, they can make better business decisions. Most owners I work with don’t know their current profit margins – often this “business-as-usual” mindset leads to misfortune. Organizations must strategically analyze their current as well as projected profit rates.
They also must compare these profit rates with their business plans for the next one to three years, which will ensure overall preparation for all the financial investments coming up.
Critical Questions to Ask
- Where does the company make the most money?
- What is our profit plan (budget) and why is it critical?
- Has the organization identified how it will make money?
- What is the company’s profit design strategy?
- How competitive are your prices?
- Do you know what competitors charge?
- How do you know if your pricing structure is effective?
Strategy that is specific and complete will help to drive profits necessary for the company’s growth. Remember the following:
- Create a profit plan (budget). 12-month view of the company’s core skills from which it derives revenue, monthly projections of revenues, cost of goods and expenses.
- Understand your cost of goods/sales and how much gross profit is made on each product or service. This allows you to best evaluate and make good decisions on where to allocate limited resources.
- Price points can rise or fall and stay ahead of competitors. By taking an aggressive view on cutting costs, a company can not only survive in tough times but actually thrive.
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