18 November 2020

Increasing your net profit will pave the way for financial stability and steady growth

Profit is one of the most important life-giving elements of any business. It’s only natural that business owners want to do everything they can to increase net profit. After all, it is a reliable measure of the quality of business results over a certain time. It tells you whether a company has the financial capacity to meet current and future business requirements. It also signifies the objective attractiveness and viability of a particular business in the eyes of everyone else.

Hard as it may to believe, but not all business owners actually strategise to increase their net profit. For most of them, the answer is obvious: get more sales. They do it by selling more or raising prices, both of which are rather fiddly to pull off.

The truth is that an increase in sales doesn’t always mean an increase in net profit. It doesn’t always work that way.

Yes, increasing sales revenue is beneficial to the bottom line, but it serves as a double-edged sword when it comes to calculating the net margin. Increased revenue is good, but having a larger revenue also means a larger figure at the bottom of the net margin equation.

Net Profit Margin = Net Profit / Revenue

And because the net margin formula divides net profit by revenue, when you do the math, an increased revenue can also pull down the net profit margin.

Therefore, the best strategy is to concentrate on increasing sales and cutting back on expenses simultaneously.

 You can start by managing and reducing your cost of goods sold (COGS)

Cost of goods sold (COGS) represents the direct costs that come from the production of the goods sold (or services rendered) by a company. The COGS includes the raw materials expenses and the cost of labor used to produce the product. What it doesn’t include are indirect expenses such as distribution costs and sales force costs. It appears on the income statement and is deducted from revenue to calculate your gross profit.

How to reduce it? Start by negotiating price-friendly concessions from suppliers. You can also look at bulk-based price discounts or long-term supply price protection. Your direct labor costs can be reduced by being on top of workforce productivity and quality, streamlining production processes, and as much as possible avoiding production rejects. When your COGS is lesser, it immediately increases gross profit level that can allow you to comfortably absorb operating expenses, and ultimately achieve a good net profit margin.

How well do you know your numbers?

If at all possible, look at reducing utilities

Reducing your utility use is always worth a try when you’re running a business, much more when you’re trying to maximise profit. There’s always a way to limit power, gas, or water consumption. You can start by turning down heating and cooling outside of business hours.

You can even downgrade your utility subscriptions, such as your phone, internet, and refuse plans. You can do this while still making sure your utilities cover enough to keep your business functional, just not too much that you’re actually wasting money.

Evaluate your product lineup and develop a revenue-increasing plan

Look at your current selection of products and consider making changes to increase your net profit. One route is to adjust prices upward to increase the gross profit margin. Another route is to lower some prices to boost the volume of sales and the net profits. Re-evaluating could also help you consider the possibility of eliminating some products or services to focus on those that are profitable. This may also include adding some products or services to the lineup to increase cross-selling and up-selling opportunities.

If you can maintain that your pricing decisions are grounded in reality, then this revenue-increasing plan should not cause you to financially suffer. Bank on quality to support your pricing strategy, and cross-reference your actions with thorough sales prospecting, sales productivity, and of course, genuine customer care.

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