The question of how to increase profit margins is one that an owner of any kind of business, big or small, asks his or herself throughout the life cycle of the company.
While you likely have a vision and a plan by which you want to approach that vision and make it into a reality, it can all be for nothing if you don’t have the profit margins to justify the effort.
So it makes sense that, in that context, you would want to do everything possible in order to make sure that vision is achieved.
But just what can you do to make things happen?
That’s the topic we’ll explore in this post, as asking the question of how to increase profit margins is one surefire way to secure your company’s future.
Tips for Improving Profit
What exactly is a profit margin?
The simplest definition is that your company’s profit margin ratio is the number you get when calculating the difference between sales generated and the cost of production.
Figuring out what your profit margin is involves just about every aspect of your business, not just the products and services that you offer to your customers.
Keep that in mind as we go through some of the ways that you can increase your own profits.
- Cut Your Costs – Sometimes, increasing the amount you bring in is as simple as decreasing the amount you send out. It works for personal finance and, in theory, it can work for business finance as well.
Look at everything you spend on your business, from the rent at your office space, to what you pay for the equipment you use to provide your products and services.
Doing so may provide you with some insight into ways that you can reduce operating costs without harming your relationship with your customers. That way, everyone wins.
- Renegotiate What You Spend on Materials – No matter how much trimming you do, there are some things that you simply can’t go without.
In the case of the raw materials you use to provide your products, you may be able to renegotiate with suppliers so that quantities can be had for less.
This, of course, relies on maintaining strong business to business relationships, but doing so will allow you to continue providing without sacrificing quality.
- Be as Efficient as Possible – How effective this is will depend on the size of your company. When asking yourself how to increase profit margins, you need to think about whether or not your business processes are being carried out as efficiently as possible.
Think about your accounting practices, for instance. Depending on how complex your company’s needs in that area are, you might save time by hiring a professional company that specializes in handling things like payroll.
Yes, outsourcing costs money, but that investment could easily come from some of the other cost saving measures discussed here. The time that you save could easily go toward more productive business-related endeavors that could help bring in revenue. In certain instances, outsourcing the non-revenue generating processes in your business can actually be cheaper and more productive than the cost of a full-time employee.
- Create Value for Your Customers – This statement can be interpreted in a number of different ways, but trying to answer the question of how to increase profit margins should always include it.
The value that you offer to customers can include things like being the exclusive provider of a product or service, adding a personal touch that the customer won’t easily find anywhere else, or adding enough variety in your services that you serve as a “one-stop” solution for everything they need (think of big box stores).
On the opposite end of that, you can be a specialty provider of a certain product or service. When that happens, the question of how to increase profit margins becomes one of how you can set yourself apart from other specialty providers.
In that case, you want to take advantage of every opportunity you come across to forge strong relationships with your customers and provide them with something that they can’t get anywhere else.
It’s important to remember that turning your customers into fans is one of the best ways to increase profitability because, as you most likely know, word of mouth spreads fast.
You always want that word of mouth to be positive, no matter what.
There’s more to answering the question of how to increase profit margins than what’s listed here, but the tips above are applicable to a wide variety of companies, no matter what industry they’re found in.
If you want to know more about increasing profit margins within your own industry, it pays to look at your own practices and compare them to what others within your sector are doing.
By doing so, you’ll probably take away lessons of what to do as well as what not to do when you want to figure out how to increase profit margins.
By following some of the steps outlined here and complementing them with your own research into things that apply in your industry, you can be sure to see increased profit margins before you know it.
Remember, running a business successfully does not need to be complicated. Keep it simple!
For more information on business analysis, business planning, and ways to grow your small business profitably, please check out our website. Follow us on Twitter @portalcfo
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Manny Skevofilax is a consultant and speaker that assists his clients with successfully navigating the challenges of growing their businesses profitably. Since 2003, Manny helps businesses to enhance their financial results by using his experience in strategic planning, financial statement analysis, operations, and team-building. His consulting firm, PORTAL CFO Consulting, Inc., has attracted clients from diverse industries in the United States and abroad.
Manny can be reached at 410-808-3441 or via email at firstname.lastname@example.org.