- October 13, 2017
- Posted by: radical
- Category: Radical Tools
If every person wants to have more or make more next year versus this year, then every company needs to grow and continually increase profitability. Owners, be they founders, private equity, public or private shareholders all demand profitability. Your company cannot afford to give 5% cost of living adjustments if they cannot increase profitability by more than that.
There are only three ways to increase profitability, 1, increase revenue 2. reduce costs and expenses 3. improve margins. That’s it, it’s simple right?
Increase Revenue: The caveat here is increasing revenue while maintaining 2 & 3. If you sold 100 units last year and sell 105 this year while maintaining your costs to deliver, pricing and margin you should make 5% more in profit. If however, you hire a new sales team that costs you 7% more than last year you decrease profitability, same as if you offer a 20% discount to sell those last 5 units. Increasing revenue while maintaining ratios will lead to more profit.
Reducing costs and expenses: The goal here – if not obvious – is reducing your operating and delivery costs. If you can reduce your fixed or variable costs from $50 to $45, you will earn an additional $5 in profits. If you cannot drive revenue growth you have to closely manage or reduce your expenses to compensate. If revenues are flat or declining you need to rethink your delivery processes to find ways to maintain profits.
Improve Margins: You may be thinking isn’t that what 1 & 2 are for? If I reduce costs I improve margins and if I maintain costs and grow revenue I improve margins. You’re right, here we’re talking about pricing level margin improvements. Are you selling your products or services at the right price and margin? Pricing is complicated, if you increase pricing you may turn away customers if you reduce pricing you may find new customers but at reduced margins. First, ask yourself why is revenue failing? Then test your customer’s pricing elasticity, would they stop buying if you increased prices 1, 2 or 3% If your competitors are driving down prices, is there a potential volume tipping point?
Sure it seems simple, but there is tremendous complexity in simplicity. Call us if you’re seeing decreased profitability and want to turn things around.
Also published on Medium.