In the world of growing businesses, one objective of every business which remains common irrespective of their type, stage, product line, strategies, etc. is profit maximisation. Profit is considered to be the ultimate aim of any business organisation; may it be a multinational company or a start-up. You can run a successful business when you can balance your income and expenses well. For any company, increasing the profit margins may be fundamental to growth. If you have sufficient funds, you will be able to face all the contingencies and funds for the expansion of your business.
The profit margin should be calculated and analysed based on the industry and the model of your business. Nowadays, companies are focusing on innovative techniques to boost their sales and increase their revenue. But, in reality, increasing sales and income may not result in a higher profit margin. Even after the profit amount is being calculated a lot of expenses are deducted and eventually the sum in hand is minimal.
Thus, this article will focus on different strategies to increase the profit margin, which will help every kind of businessman take necessary steps accordingly.
What is a Profit?
Profit refers to the amount of revenue that is remaining after paying off all the expenses. When any business generates income through selling, the income earned after paying all the necessary expenditure, costs, and taxes is termed as profit.
There are many types of profit, and the owner may focus on any of them according to the business’s needs and requirements. The three common types of profit are -
- Gross profit
- Net profit
- Operating profit
Why is Profit Important for Any Business?
No business owner may establish or run a business for making losses or reaching the break-even point. Without incurring a good number of profits, no business can survive, grow, and have financial stability. Few reasons why they are essential are -
- Staying in a competitive environment.
- Increasing the earnings for our investors.
- Good credit rating and availability of credit.
- Enhancing the valuation of the business.
- Repayment of loans.
- Reflection of management’s ability to attract new investors.
- Ability to pay higher remuneration to the employees.
- Fulfilling social responsibility by returning to society in the form of donations, charity, etc.
- Maintaining liquidity.
Strategies to Increase the Profit Margin
It may seem easy to know and understand the strategies as to how to increase the profit margin. But, in reality, it is equally challenging to implement during your course of business. Not every technique may apply to all kinds of businesses, but most of these will help any business owner increase their profit margin. Let us discuss these strategies in brief.
1. Boosting your business’s sales
The simple calculation is that when there is an increase in business sales, the revenue increases, and so does the profit margin. But the main question that comes here is how to boost the sales of the business. Designing various marketing strategies and using marketing tools, building relations, and networks will always help.
2. Increasing the selling price
By increasing the selling price or calculating the selling price after deciding the profit margin percentage can be one technique. To get an assured amount of profit, many business owners utilise this method. Do not increase the selling price drastically; this creates a negative impact on the customers’ minds.
3. Managing investments
Manage your assets so that no taxes have to be paid on the amount realised as gain or income. Invest your profits in tax-free securities and where the interest on investments is not taxable in the hands of the business or the owner. This will help increase the net profit.
4. Claiming deductions
It may be possible that your business may be earning good profits, but most of the amount may be paid in the form of taxes. Claiming deductions helps in the reduction of taxes and hence increases the profit available for distribution or retention.
5. Inventory management
Gone are those days when businesses used to invest a large amount in inventory. It hampers the working capital cycle and creates liquidity issues. Invest in good inventory management software and use approaches that help to estimate the number of materials required.
6. Cutting down on unnecessary expenses
Small drops create an ocean. Similarly, we may not pay heed to small unwanted costs, and they may be impacting our profit margins. It may be paperwork, office spaces, credit card bills, etc.
7. Managing offers and discounts
Do not give a lot of offers and discounts to your customers. It should be limited to maybe once or twice a year, depending upon the occasion. Also, discounts given to the suppliers and debtors should be monitored and compared with other businesses.
8. Enhancing the cash conversion cycle
Many business owners fail to understand the cash conversion cycle. It shows how long the working capital is tied up. It denotes how many days a firm takes to convert its inventory into sales and cash. Liquidity and profitability are different concerns, but yet interlinked and hence liquidity may ensure profitability.
Insurance must be taken for the business’s various aspects as it helps to overcome losses. It helps in avoiding any risk, and no expense needs to be incurred when something happens. It helps in maintaining the profit margin also. However, not a massive portion of expense should consist of insurance premium expenses.
10. Team building
Selecting the right team is critical to work towards the organisation’s common objective. Instead of removing them, take inputs from them, and the best option to increase the profits can be strategised.
11. Eliminate the middlemen from the supply chain
Contact the direct producers and suppliers. Eliminating the middleman helps in saving costs, and hence we can increase the number of profits.
12. Review your product line or services offered
Focus on the products which are loss-making and reduce the profits when consolidated. If your business provides many services, then only continue the profitable ones and discontinue the ones that are not needed.
13. Retaining your customers
Focus on customer engagement programs and use innovative techniques to maintain the existing customer base. They will ensure timely sales and hence increase the profit margins of our business.
The more innovative your ideas are, the more customers you will be able to attract. You can generate new leads with the help of innovation and various marketing techniques, thus increasing the revenue.
15. Outsourcing vs In-house
If any material or function is an integral part of the production cycle, make sure you compare the costing of making it in-house and outsourcing it. This will ensure low expense and a rise in the profits.
Thus, we can conclude that profits are the lifeblood of any business. Increasing the profit margin may be referred to as an art that requires efforts and understanding in the right direction. You should aim to grow your business profits and run a sustainable business while contributing to society’s development as a whole. Organise your data and profit and loss statements correctly, and you are almost there.
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Q. How to calculate the gross profit margin?
Ans. Gross profit margin is calculated by deducting the cost of goods sold from the actual sales figure. To arrive at a percentage, you may deduct COGS from revenue, dividing it by total revenue multiplied by 100.
Q. What is the operating profit margin?
Ans. The operating profit ratio or margin indicates the profit a company makes after paying all the variable expenses such as labor, raw material, direct expenses, etc. It shows the efficiency of the company in handling business operations.
Q. What are the ideal bills receivable days?
Ans. The bills should be ideally received within 45 days of the goods sold or the services provided. But it depends on the type of business organisation also.
Q. Is cutting down on employees a technique for increasing profit margin?
Ans. Many companies think the same. But, in today’s world, the employees are considered to be an invaluable asset. It may never help in increasing the profit margin.
Q. What is a good profit margin?
Ans. There is nothing like an ideal percentage or profit margin. The value may vary from business to business, depending upon the industry the business belongs to.