Healthy profitability is integral for the survival of any business entity regardless of its size and industry. Business Entity is incorporated to generate a suitable rate of return for its investors through successful business operations.
In a corporate entity, the Board of Directors have the fiduciary duty to strategically plan out the profitable business operations, recruit valuable corporate resources, take solid decisions to meet an entity’s long-term goals, enhance the integrity of financial statements and to make sure a healthy rate of return being generated for the shareholders. In large corporate entities with diversified business operations departmental managers are assigned the task to plan out their departmental budgets and generate sufficient level of profits out of their controllable area.
In a nutshell “Business exists to make profits”. If a Business fails to generate suitable levels of profits to satisfy stakeholders then it demises.
How to increase Profits in a Company
Regardless of the size of the entity, either you are the manager in a large corporate entity or simply an entrepreneur in a newly launched startup company, these three tips will help increase profits in your department.
1. Reduce Costs
This is the best and the most reliable way to direct a company upon the path towards profitability. Although it may sound a daunting task for some entrepreneurs but the matter of the fact remains even during harsh economic conditions there is room for reduction in costs. Improving business operations by introducing a new product mix, replacing obsolete equipment, improving internal systems, training workforce etc reduces costs in addition to improving efficiency. Monitoring and Controlling Direct and Indirect Production overheads such as administrative and distribution expenses is also vital. It is good to introduce total quality management system along with just in time inventory system where the reduction in some of the defects, repair costs, warranty costs, inventory procurement and inventory holding costs are lowered. Shifting the focus upon working capital funding strategy may not only improve liquidity of the company but also help lower the interest rates charged on overdraft, short-term sources of finance.
2. Inflate Selling Prices
This is a hard step and may improve profitability to a desired extend but in the meanwhile may deplete market share and annual turnover. The corporations today, shift the excessive inflation load upon end consumer’s with a price hike but if you could maintain stability in prices keeping the quality intact then generating enough profits in the upcoming years are more probable.
3. Discontinue Loss Making Operations
This is the last resort after all the avenues have been explored. It will be a rational decision to dispose of loss making operating segments or discontinue the production of a product or provision of a service that consumes too much off the entity’s resources but generates only a fraction of the total revenue. Although an Operating Segment or a Product may not be profitable for the time being but may generate some high profits in future. It is advised to plan out improvement of the non-profitable business operation instead of ceasing it otherwise you might be missing some long-term healthy profits.
Although redundancies and staff reduction may curtail costs but in the long run harmful effects will be laid upon the overall performance of an entity so it’s better to invest some funds in improving internal systems for enhancing profitability.