Improving profits is not just about increasing the number of sales you make, but understanding the key drivers that underpin your business.

Entrepreneurs always want to increase profits but how this is best achieved is often misunderstood. An increase in turnover does necessarily mean more profit; greater revenues are often won off the back of higher costs such as increased storage space, marketing spend and sales commission. Many successful businesses use key performance indicators (KPIs) to measure the success within their business and to help them focus on what is truly important when striving for an upturn in profit.

Defining your KPIs

Every business has a different set of KPIs and each company will have to update them as it develops and grows. KPIs are the key facts that enable you to assess your progress and understand what makes it profitable. It could refer to the number of financial factors such as sales, cost per acquisition or footfall. But they should also include non-financial data and less tangible aspects of your business such as client satisfaction. KPIs can be forward looking, enabling you to make decisions on resourcing, investment and expansion. Finally, it is best for them to be simple and limited to about six.

Cost control

Cutting costs is a good way to boost profitability but one which should be undertaken with care. The effect on profitability is immediate and advantageous but if, for instance, you cut your marketing or advertising spend it might have the negative effect of reducing sales in the long-term. Cost reviews should be looked at under specific headings (materials, transport, advertising etc) and these should be regularly monitored. It is essential to get to grips on how much return on investment (ROI) you are getting from each so you can assess how important it is. For instance if you are renting a vehicle how long do you have to run it before you start making a profit? It is only through regular reviews and understanding ROI that prudent cost cutting can be undertaken. 

Maximising revenues

As mentioned, increases in revenues can improve profit but there are costs associated with increased production. Try to focus on working ‘smarter not harder’ to maximise the return you get for the product or service you provide. One way to really do this well is to understand your product/service, clients and competitors comprehensively. Do you understand why clients buy from you or from your competitors? Market research, even when conducted in the most basic way, is a very valuable source of information and can provide you with ideas and feedback that can enable you to enhance your offering in the clients eyes. This can actually lead to them spending more with you investing less – a classic ‘win win’ situation. Market research will also tell you how you are perceived. This can be a real eye-opener and might mean that you alter your product or, more likely, change your marketing message. Remember that it's not necessarily the best product that will maximise profitability but the one which is best perceived, so the manner in which you promote and support your product or service is key.