Chuck Leblo is the founder and chief strategist at Interact One. His focus is on strategy, critical thinking and problem solving.
When business owners mention their profit margin, they usually discuss revenue as if it were an accepted result rather than a sought-after profit. Many leaders even think they have little to do with their profit margin, but in reality they have all the power in their hands.
Profitability, like any aspect of a business, is something that requires constant evaluation. Think of marketing campaigns. At the beginning of the campaign, an expected return on investment would be determined and certain goals would be followed to determine if the campaign was successful. The same goes for the company in general. If you as an entrepreneur go to your fixed and variable costsyou must understand that regularly evaluating these expenses is an essential part of profitability.
Profitability is a goal, not a given
Many companies do not plan for profitability; they accept its existence. But that’s not the most effective way to do business. After all, profitability isn’t about how much money you make. It’s about how much money you have left. So, how can you make your business more profitable?
As an entrepreneur, you have control over two important components: processes and costs. These aspects complement each other, as ineffective processes can cost both time and money. By streamlining your operations, you can increase your profitability.
Ways to evaluate and optimize your operational processes
To streamline your internal processes, you first need to consider how productive your current workforce is and where the inefficiencies lie. When several people are involved in a process, it can often become too complicated and poor coordination can lead to reduced productivity. While this can be mitigated somewhat by promoting open communication, one of your most important roles as a business owner is to ensure the efficiency of your processes.
Find ways to reduce the number of steps in a process to maximize efficiency. For example, does a form have to bounce between three departments before it reaches your desk, or can it be handled by just one? Are there tasks that can be automated? By asking these kinds of questions, you free up time for your employees, which can help them be more productive.
Looking at the services your business provides is another way to streamline. Products or services with lower profit margins should be assessed individually to determine whether they are negatively impacting your profitability. Take, for example, a content marketing company that makes a 49% profit margin from the content it creates. The company decides it wants to add web design services, which is a more expensive item. Due to the new costs associated with providing web design such as hosting, web developer fee, graphic design and other fees, providing this service results in a 25% profit margin. Thus, the company does not see an increase in the money it holds, despite the higher price for this service, due to the costs involved in providing it.
Ways to Evaluate Your Spending
Watching your expenses — understanding how money is spent on contracts, subscriptions, and other repetitive costs — is the other important part of maximizing your profitability. A lesson I learned early on in business is that profit is made on the purchase and revenue is made on the sale. The sale is representative of all the costs associated with the sale, and the sale is what you actually get for it. So the lower your cost acquisition, the more profit you will make.
It’s critical to the health of your business that spend is reviewed regularly so you can determine how important the services are to your bottom line. As a business owner, these items can often sneak under your radar as much of your time is spent making strategic decisions for your operations. As you make essential purchase choices, everyday expenses can make or break your business and as such they need to be reviewed regularly.
Profitability is not an immovable wall in your organization. By staying on top of your operating costs and areas of inefficiency, as a business owner, you are doing your part to drive profits up.