How can you increase your profitability?

Reasons for the decline in profitability :

There are 3 main reasons for the decline in profitability :

1. Falling sales. Occurs as a result of inefficient promotion or a decrease in demand for the supplier's goods.

2. Increasing company costs. It can be observed due to an increase in purchase prices, the inability to increase production load, supply problems, fines, and incorrect site operation.

3. Excessive growth of working capital. The reason may lie in the mistakes of responsible employees, including incorrect settlements with counterparties. 

Ways to increase your profitability :

To improve the return on cost, production, or the entire project, you need to find the reasons for the low rate and work on the points that require active actions. 

Generally speaking, there are several ways to achieve higher profitability.

• Improving the quality of the product : 

After learning what your prospects need, it’s important to develop a high-level product vision and quality. This will allow you and your team to employ a more strategic approach to product development and better satisfy your customers. 

• Increasing production capacity : 

If demand exceeds supply, then you must imperatively increase your production capacity to serve the existing clients. 

• Creating more attractive packaging : 

An attractive package attracts people and creates a desire to try the product. So to make sure that this client purchase again your product, you don’t need to focus only on the package but on the quality of your product.

• Cost reduction without sacrificing quality : 

Reducing costs without sacrificing the quality of your products helps you increase your profit margin. 

• Reducing payroll costs : 

There are several ways to reduce personnel costs. We can do it by : 

• Reducing salaries. 

• Reducing bonuses. 

• Reducing the working hours. 

• Transferring some functions to outsourcing. 

These measures are relevant both in times of crisis and in the long term.

• Update the management structure : 

In a turbulent market environment, continuous improvement is a necessary condition not only for successful development or improving your profitability but also for the existence of your company in the long term. 

The world around us is constantly and unpredictably changing. A process that worked perfectly yesterday may turn out to be ineffective today, and tomorrow it will not allow meeting the demands of the market. 

This means that the processes must be constantly adapted to new external and internal conditions through systematic improvement.

• Improving marketing strategy : 

Developing your marketing strategy helps you to : 

• Increase your company's market share in the market;

• Increase your company's sales volume.

• Gain a leading position in the market.

• Other…

The thing that enables you to develop your profitability.

• Employee training : 

Training your employees increases their loyalty and commitment to your company. The thing that improves their productivity. 

According to research by the Copenhagen Business School, increasing your employee loyalty by 10% helps you increase your customer loyalty by 12.5%, which increases your profits by 9.6%.

The most profitable types of businesses :

Regarding profitability, it should be borne in mind that different coefficient values should be considered normal in different areas of the economy. 

The activities with the highest rates are not always the most profitable.

According to Rosstat “Russian Federal State Statistics Service”, the TOP 3 most profitable business areas in 2021 include :

• Real Estate.

• Fishing.

• Mining.

In contrast to those listed, the lowest profitability of public utilities (negative value). 

The financial sector boasts an indicator of 0.7%, retail trade (including online) - 2.2%.

Summing up :

The calculation of profitability ratios gives a general idea of ​​the current state of affairs in the company and its best prospects. 

However, these values ​​do not always objectively characterize the work of the company. 

For example, assets tend to change their value over time, so a one-time calculation of profitability may be incorrect. 

Indicators for long-term investment, as a rule, are small, and it is necessary to calculate the coefficients for different conditions and terms.

You can not focus on profitability as the only indicator of the company's performance. 

To draw an objective picture, it is necessary to use other additional analysis methods such as :

• The study of the cost structure.

• The determination of financial stability.

• Other indicators…