Critical Factors for Improving Profitability

In a recent survey of our clients, improving profitability emerged as one of the top three priorities on their business agenda. Profitability is the lifeblood of any successful enterprise, and understanding its intricacies is crucial for business owners and managers alike. In this blog, we’ll dive into the two primary drivers of profit and explore the indispensable link between profitability and cash flow.

Profitability factors are affected by sales and reducing costs. Within the realms of sales there are 3 critical areas: price, volume and customers. These elements are not isolated but intricately interconnected, each influencing sales in unique ways.

1. Price

To improve profitability and performance, price sets the scene. It will determine the volume of sales and ultimately attract different types of customers.

The most obvious part of profitability is the selling price. It is essential when determining the price to ensure that the price and sales volume allow the business to be profitable. It is therefore, good practice to also review these prices regularly.

Setting prices involves a careful balance across your product range. It’s common to have “loss-leader” products, which may not yield substantial profits but can be offset by other lucrative offerings. Competitive pricing and your desired market positioning should also guide your pricing strategy. Discounts can boost sales volume but may impact profitability, so diligent record-keeping and regular review are key.

When offering a discount to a customer, always remember that the discount will increase sales volume, but it will also eat into the profitability of the products. You should record all discounts and review them regularly.

Two valuable metrics for monitoring pricing effectiveness are profit margin and mark-up. Both metrics should be in sync with your pricing strategy, allowing you to make necessary adjustments.

• Always review your gross and net margins against previous periods
• Understand customer profitability and their behaviours
• Minimise discounting if possible
• Implement and review a mark-up policy
• Analyse sales on a regular basis.
• Use key financial indicators to identify any anomalies that may impact the sales price:
  • Cost of goods sold margin
  • Gross margin
  • Average stock turnover
  • Mark-up

2. Volume

There are two ways in which volume can be increase. The first is through increasing your current level of sales with your existing customers, and the other is sourcing new clients.

To boost sales with existing customers, implement a comprehensive marketing strategy and capitalise on the often-overlooked opportunity of up-selling. Effective sales targets and an understanding of your break-even point are essential to drive performance.

Selling targets are a way to monitor overall performance and enhance profitability. Therefore, I advise you to look at this carefully as it can have an impact on other areas of the business. Understanding your break-even point will allow for realistic targets to be set and ensure profit is maximised.

To help increase the volume:

• Understand your customers’ buying patterns
• Implement a marketing strategy to increase sales volumes
• Introduce loyalty programs that encourage referrals
• Train staff to excel in upselling high-profit products.
• Use break-even calculations to set achievable sales targets
• Explore opportunities to expand into new markets

3. Customers

Exceptional customer service is the cornerstone of customer retention and acquisition. Understanding your customers’ needs and preferences is a simple yet powerful step towards business improvement. Utilising a Customer Relationship Management (CRM) system can provide invaluable insights into customer behaviour.

• Understand the needs of the business customer and use this information to improve the customer service experience.
• Utilise tools like Survey Monkey to measure customer service levels.
• Reward current customer for their loyal support
• Consider using mystery shoppers to monitor customer service
• Maintain regular contact with customers to stay top of mind

In conclusion, the pursuit of improving profitability is a nuanced journey, and this blog only scratches the surface of what’s achievable.

At The CFO Centre, we boast a team of over 45 experienced CFOs across Australia and New Zealand, and over 1000 globally. Our track record speaks volumes about our ability to help clients boost their profits. If you’re interested in learning more, feel free to contacting us at 1300 447 740. Your success is our priority, and we’re here to help you on your journey to improving profitability.

You can also get in contact with us here.

First published on 22nd Feb ’22
Updated on 15th Jan ’24