The benefit is the positive financial gain your company makes after you have subtracted all your expenses. The ability to generate profits is crucial to the survival of your business. It is about more than making money. It is also about the possibility of using surplus funds to invest and make your business more profitable. Profit is not the same as cash or sales, and it is not money in the bank or hand. The benefit is represented ‘on paper’ in your accounting system.
To make your business more profitable, you must understand the concepts of profit margins. Next, you can develop strategies to make your business more profitable by increasing your profits, including ways to increase your sales revenue, your profits on individual products and services, and lower costs. You can use the tools, diagrams, and tables in this strategies to improve profitability will help you to make money. The minimum sales requirement and to plot the most important products for your profit margins.
Strategies to improve profitability
This guide explains how to make your business more profitable by helping you identify and understand the financial factors that affect you.
Calculation of profit margins
Your gross profit margin is a key indicator of the overall health of your company. The gross profit margin shows whether the average margin of your products or services is sufficient to cover your direct expenses and make a profit.
To calculate your company’s gross profit margin, you first need to calculate the gross profit. Use an interactive calculator which help you calculate your gross profit margin. Once you have read and understood the examples, you can write the numbers that are relevant to your business in the calculators to see your gross profit and your gross profit margin.
As the owner of your most profitable business, this is a useful exercise to understand which are your most profitable and unprofitable product lines. You may even decide to stop offering unprofitable lines and concentrate on your most profitable products.
Set a profit goal
Your profit objective is the amount of money you need to meet a series of predetermined commitments that are important to you and the future of your business. Identifying a profit target will help you direct your actions and strategies (once you have identified your benefit drivers) to achieve your goal.
To establish a profit objective, you should consider the following:
Costs (both fixed and variable)
The annual income of the owner
Operating expenses (fixed and variable)
Return of borrowed capital through quick loans
Return for risk and growth.
We recommend working with your commercial advisor to help establish an objective of adequate benefit for your business.
Fixed costs (general)
Your fixed costs (also called indirect costs) are indirect costs that remain the same regardless of your production. This includes things like rent, utilities, maintenance costs of your workplace, license fees, insurance, and accounting.
Your direct costs, such as labor and the cost of raw materials, are only generated when you create or manufacture a product, so they are not counted as fixed costs.
The annual income of the owner
When calculating your income, you must use an amount that would pay an employee to do the job you are doing. It should include retirement, but it should not be an inflated salary.
Return on borrowed capital
The profitability of the loaned capital refers to an adequate return on the capital that has been invested, at least equal to the long-term bank interest, as well as to additional profitability based on the level of risk.
Return for risk
This is the return you would expect, taking into account the associated risks: running a business has more risk than putting funds in a bank.
The return on risk must be calculated in direct proportion to the risks involved. For example, if you were to invest in a highly speculative business venture with little chance of success, you would expect a very high rate of return if you were successful.
Return for future growth
This is the amount you need to invest in the future growth and development of your business. You may need to expand your facilities after a few years, develop an innovative way to provide a service or new products or develop a new marketing strategy.
Reaching your profit goal
To reach your profit goal, you need to calculate your minimum sales requirement. That is, you must calculate the level of sales (billing) that will produce enough revenue to cover your operating costs plus your financial commitments.
The sale price and the profit margin are key determinants of the level of sales you must achieve to generate enough revenue for your business. The higher the sale price, the lower the volume of sales required (and vice versa).
For each product you sell, the money you receive will cover your variable costs (materials and direct labor) and contribute to your fixed costs and profit goals.
Minimum sales requirement
The minimum sales requirement is the point at which your gross profit covers both your fixed cost and your profit goal.
It is often useful to express the minimum annual sales requirement regarding weekly, or even daily, units that you need to sell. If your company is not able to negotiate with the minimum sales requirement, then it will not be able to meet your profit objective.
Once you have read and understood the example, you can write the numbers that are relevant to your business in the calculator to see your minimum sales requirement.
Your products or services with the highest gross profit margin are the most important for your business. They generate money. Once you have identified your most profitable items, you should focus on achieving higher sales goals for them. It may require you to rethink aspects of your business or design strategies to improve profitability. Consider using a business consultant to help you.