Profit margin is a very useful metric to monitor when competing against businesses in the same sector but it can be difficult to maintain during a period of sales growth.
For example, a net income of £1 million on sales of £10 million offers a ten per cent profit margin but next year could deliver £20 million in sales but £1.5 million of net income, delivering a profit margin of 7.5 per cent. So, even though the company has delivered more sales than the previous year, the profit margin has shrunk.
As a result, it is important to focus on maintaining and growing profit margins during the year. Here are a few quick wins that you and your company can try to boost these margins.
Price
Price can be an important differentiator between you and your competitors but, while base price is an important aspect of making a profit, it is the value delivered that remains one of the key drivers of sales.
AllAboutBusiness suggests that customers “don’t care about your costs or your time; they only care about the value” that a business delivers, so focus on value over price. This way, customers will be happy to pay a premium for high-quality goods and services; a factor that could be essential in boosting profit margins, especially if initial product/service costs are low.
By managing the gross product margin through value (or finding cheaper raw material or negotiating the cost of production), businesses have an excellent way to keep their profit margins in line with increased sales.
Efficiency
Businesses also needed to be questioning whether its processes are being carried out as efficiently as possible, as this is a key factor when trying to improve margins.
For instance, businesses may require the services of a professional auditor to improve their performance. Performance can be improved by achieving registration to international standards like ISO 9001 for instance, or through the implementation of management systems that can streamline processes and improve efficiency.
Accounting practices should also be monitored and other non-revenue generating processes can also be handled by outside firms, enabling a more professional, efficient way of working; resulting in cost reductions and higher profits.
Expenses
Managing expenses can be an effective way to improve profit margins as high expense levels means less money for the company. As a result, cutting down on operating expenses – salaries, rent, utilities, depreciation and more - is a quick way to boost profit margins but business owners need to be careful; cuts need to be made without sacrificing overall productivity and performance.
For example, cutting a worker’s salary may enable a short-term boost but it could instigate a drop in performance. As a result, business owners need to ensure that any cost-cutting measures are made with a view to streamlining – rather than hindering – performance.
These are just a handful of processes that can help boost profit margins but no two businesses are the same; sit down and analyze what can be done with regards to price, efficiency and expenses and see what improvements can be made.