How to Strategically Increase Profits in Your Small Business

increasing profitabilityIn writing this post I did some research. What I found when searching “increasing profitability” was very disheartening.

Why, you might ask? Because everything was a list of tactics that could be used to improve profits.

But, which one is right for your situation? That’s the real problem. If you don’t understand the cause of your anemic profits, then you may not fix the root-cause problem causing it.  As a result, you didn’t get all you could in increasing your profitability and quickly profitability will settle back to a less than optimal state.

Strategically Understanding Profitability

To maximize profitability, you must first understand what profitability is.  It is a financial metric which measure your business’s efficiency.

However, many owners believe when it’s a financial problem. In fact, it’s an operational problem (cause) that manifests itself in a financial problem (effect).

There are three strategic causes of poor profits.  The first two are obvious to all business owners – too little revenue and too much expense will cause low profit.  However, the one most owners miss is poor productivity! The video below gives a quick introduction to this important strategic cause of profitability problems.

How Owners Usually Try Increasing Profitability

increasing profitability by cutting costsTo get started you need to isolate what’s causing your profitability problem. You may say, “it’s obvious, my costs are higher than my revenue.”

So, the quick fix small business owners usually use is to cut costs where they seem high which hopefully results in increasing profitability. But this fixes profit for short period until the rest of the operational process catches up, then the root-cause problem takes hold again and profits settle in or worse drop back where they were.

Sound familiar?

Increasing Profitability that Sticks

The previous approach for increasing profitability oversimplifies the problem. You need to first ask, why are your cost higher than revenue?  You may arrive at the conclusion “because my labor cost is too high” if you’re only reviewing your financial reports if you’re doing good financial accounting.

So, you jump to the conclusion that you can fix it by cutting labor expenses. Therefore, your attempts at increasing profitability goes up and down like a seesaw. You never fixed the real problem you just addressed the symptom you saw.

Fixing high labor takes a little more digging and most owners don’t have what they need to figure this out.  This is why I always advocate an operational approach to managing your business like Tuning Your Revenue Engine.

 

Your financial may show a direct labor problem, if you separate out your direct labor. But this might be a result of employees not working fast enough (productivity).  I see this in nearly every small business that I review.

If workers are working fast enough, this is costing you money. But if you increase worker productivity you spend the same and can do more. So, a productivity fix gives you a double increase – more capacity to sell and save labor cost for each cycle of work competed resulting in increasing profitability.

That’s the right way to fix a profitability problem.

Increasing Profitability for Your Business

strategic decisions for increasing profitabilitySo, what can you do to begin increasing profitability, so it sticks?  First, you must get a more complete picture of what’s happening in your business.  That means monitoring both financial and operational metrics.

Next, you need to shift your focus and become more strategic in your decision making.  When you see a problem, don’t make a knee-jerk reaction in fixing it.  Ask yourself, “what could be causing this problem?” This will help you get at the root-cause of the problem, so you fix it once and for all.

If you need help getting started, might I suggest a FREE Revenue Engine Performance Checkup.  Just schedule your FREE 30-minute operational assessment to begin increasing profitability with a DE, Inc. consultant by completing the form below and selecting your meeting time!


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