5 tips to help improve your company’s profitability

5 tips to help improve your company’s profitability


Published in :
Business strategies
Financial statements
Published on 15 May 2019
Reading: 4 minutes

5 tips to help improve your company’s profitability

Stock market-listed companies have no choice: deliver yearly profit increases and hope that valuation multiples given to their stock grows. If Wall-street mammoths can do it, then smaller, agile SMEs certainly can! Here are five ways to make your earnings statement a thing of beauty.  

1) Favour products with high profit margins 

Profit margin is the difference between the selling price and the total manufacturing cost of a given object - examine one of the two above-mentioned variables to increase profitability. For example, greater profit margin could be obtained by increasing a product’s selling price. It’s a simple equation: the higher the profit margin, the better your profitability.

First and foremost, you should assess each product lines’ profit margins to determine which line should be the focus of your efforts. Inversely, a product with low profit margins that has only sporadic sales isn’t likely to impact your yearly profitability. The wisest option is to put the vast majority of your efforts into promoting products that are the most lucrative, all while reducing or eliminating low-profit products.

2) Reduce inventory costs

You can also opt to reduce product and service production costs – something that has a direct impact on your profitability margins. It’s time to get out the accounting books, and step one is to establish budgetary limitations and periodically analyze any gaps that become apparent. To reduce operating costs, a line-by-line look at expenses is in order.

What can you do to (cleverly!) reduce the ensemble of your costs—all without compromising product quality? Become an expert at continuous improvement and take a close, serious look at your current processes—be on the lookout for maximum efficiency. After all, limiting excess stock, eliminating needless waste, and avoiding unhelpful expenses are all easy things to implement, and will help whip your profitability into great shape.



3) Make room for technology—and improved operation 

Across the globe, the smart automation of operations has become the fourth industrial revolution. The most recent advances in digital technology (the Internet, cloud computing, wireless sensors and massive data analysis) make manufacturing activities all the more effective. Once any necessary initial investment is completed, you can count on improved product quality, as well as reduced production costs.

Smaller-scale initiatives can also be deployed to improve performance and profit. For example, stock management is a constant issue for growing SMEs: your company needs to maintain adequate stock levels to meet client demand, without having to freeze precious liquidity in physical product. Because it shares a common database throughout your entire company, using enterprise resource planning (ERP) software is a great option to optimize business processes—including inventory—in real time. 

4) Renegotiate agreements with suppliers 

Your current suppliers have a vested interest in ensuring your success—for everyone’s sakes! What might you be able to negotiate in order to get more favourable terms? Might your monthly purchase volume give you some leverage to negotiate a better rate on supplies, without having to skimp on raw material quality? Could you pit suppliers against each other, to get to the bottom of who can help you improve your profitability the most?  

Increased payment flexibility is another option to consider. Why not ask for a 60-day credit period instead of your current 30-day period? This type of initiative could very well enable you to retain more of your working capital and make better use of it. 

5) Consider subcontracting 

What sector does your SME dominate? If your mission is to produce XYZ product—that meets a need your customers have articulated—focus on that product, and truly do what your company does best, the best way possible. Consider the possibility of a trusted partnership if there are many specific, repeated tasks that use many resources, and which are hard to delegate. Whether you outsource distribution, accounting, payroll or IT management, the costs associated with outsourcing could, in fact, be far less than the advantages you’ll gain.