If you run a business, chances are that you’re currently wondering how to increase profitability. And you’re right to be concerned about this.
After all, if your production costs constantly exceed your revenues, your enterprise will struggle to stay afloat. When there’s no profit being made (or if the profit isn’t big enough), you risk running into all sorts of financial problems with it. There’s also the grim possibility that the business could eventually fail.
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This article discusses some steps you can take to improve your profit margins. The points we lay out here should help you avoid the discomfort of having less than adequate financial results from your sales, and ultimately achieve significant business growth over the medium to long term.
First, let’s define a couple of terms.
Profit Margin Types
As a businessperson, you should note these two profit margin types, because they are both crucial measures of your business’s profitability:
Operating Profit Margin
This refers to operating profits expressed as a percentage of sales. In other words, it’s the fraction of every naira in sales that is an operating profit for a business.
If your business records sales worth ₦10 million in a month and its operating profit were ₦1.5 million, your operating profit margin for that month would be 15%.
Where the operating profit margin is greater than the industry average, it indicates that business expenses are being well managed.
Gross Profit Margin
This is the difference between your Gross Sales and the Cost of Goods Sold. It’s what remains when the cost involved in producing the goods sold is subtracted from the value of total sales you’ve made.
Let’s say you spent ₦3 million on the input, production process, and other costs of making the product you sell. If you made sales valued at ₦4 million, your Gross Profit Margin would be ₦1 million.
With this indicator, you can determine how efficient your company is, what products are most profitable, and whether you should be adjusting your prices to increase profits.
Steps to Increasing Your Profit Margins
Here’s how to improve your operating profit margin (and gross profit margin).
Target Faster Turnaround Times
How long does it take to get your product from the production line to the final consumer? Could you make this process faster?
By increasing the speed of your production and distribution processes, you allow your products to reach buyers more quickly. This should translate to more sales per unit time, other factors held constant.
Examine all aspects of your business related to product and service delivery. Find out whether there’s room to make things happen faster without reducing the quality of output. This may involve cutting out some steps that aren’t necessary, and coming up with more efficient ways to execute others.
Invest in Aspects of Your Business that Generate High Returns
You probably already know what your best selling products are. If you don’t, you can find out by looking at your inventory and accounting records. Channel more resources into this aspect of your business, so that it yields even more for you.
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While doing this, you’ll also want to phase out products and services that aren’t doing well with customers.
Taking these two steps simultaneously will boost sales, guarantee a higher Return on Investment for your every naira, and allow for improved profit margins.
Expand Your Revenue Sources
There are several ways to do this. You can either add new product lines to what you’re already selling or introduce new services.
For example, you may observe that visitors to your clothing store often ask you for directions to the nearest shoe shop after they’ve purchased clothes from you. This could indicate that they’d want to buy shoes from you if you sold them. In this instance, adding shoes to the range of products you sell might be a good idea.
Similarly, a firm offering web development services may include app building and digital marketing to the list of services it provides. If these are in high demand, there’s a good chance that they could bring in more profit for the company.
Upsell and Cross-Sell
Upselling involves offering customers an upgrade of a product that they have chosen to purchase. Such upgrades are usually more expensive than the alternative initially considered by the customer, and thus provide the seller with an opportunity to make greater value sales.
Cross-selling is the practice of suggesting to customers that they purchase goods complementary to the ones they have bought. For instance, you may sell them bed sheets and pillowcases in addition to beds and pillows.
Adopting either or both strategies could help you increase your profit margins, as you would be selling more items that the customer might want.
Seek Lower Input Prices
Negotiate with your suppliers to see if you can get them to sell inputs to you at lower prices. You may bring an incentive to the table like purchasing larger quantities from them. If they don’t accept your offer, you could look elsewhere for vendors who charge lower prices for similar quality inputs.
Lower input prices will help force your production costs down.
You can secure higher profit margins for your business. It’s doable. Just follow the steps we have laid out here, and you’ll be on your way to making it happen.
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