If you are a smart business owner you will know what drives your profit and how you can enhance your chances of success. This can be done by understanding the important factors which drive profits and the focus with a strong determination on these factors. In order to generate profits, the entrepreneur must first get to know their financial performance and the clever entrepreneurs are able to identify who their most ideal and profitable customers are.
It is not essential that you should be an accountant or financial wizard, but it is absolutely necessary to keep track of and understand the numbers on your balance sheet. Some of these numbers are the key drivers and indicators of your profit. You would certainly know the numbers of sales, but there is much more beyond this which you have to get familiar with. You have to know the average sales per customer or transaction, the revenue per employee, the average accounts receivable, the gross profit margins, number of leads and customer retention rate , and more than anything else – the net profit. Focus on these drivers and your small business will register a steady growth and proceed towards a profitable future.
To enumerate, the four basic drivers of profit are:
- Variable costs
- Fixed costs or Overheads
- Revenue & Sales
Now we can determine which of these drivers of profit possesses the power to have an impact on the success of your business and to what extent.
Price: One of the first and foremost things is Price. This is because a hike in price shows an immediate result and adds to your profit margin. When it comes to the question of price hike, the successful entrepreneurs are able to determine how much they can raise the price without losing profit.
Studies reveal that in case of a price hike, business people stand to lose about 18 percent of their customers who prefer buying products at the cheapest rates. These customers who sensitive only to price are not really worthwhile customers, because it is these people who constantly complain and keep returning products.
Variable Costs means the cost that is incurred in getting the product or service to the customer, before calculating overheads. This figure has a big impact on the gross profit and also on the Net profit. A small reduction in variable costs can have a huge impact on the gross profit as well as increase in revenue. Often a little attention towards your cost of goods sold and a little bargaining with your vendors and suppliers can pay huge dividends to your gross profit.
Overheads: These are the fixed costs that you incur every month or year. It is best to recalculate all you over head rates from time to time. You may have trimmed costs like your material costs and your service costs but in addition, your overhead base i.e., the number of machine hours, consulting hours, service hours would have also probably changed or dropped. It is good to remember that lower costs means lower overhead rates and lower base hours means higher overhead rates. It is important to compare overhead percentage to the Revenue, as this has an impact on the profit.
Revenue and Sales: It is an universal fact that owners of business focus most of their attention on revenue and ways and means of generating sales. This is definitely important for business. But even before you make sales there is expenditure involved, i.e., buying goods for sale, transport, labour charges, and overheads. It is important to know how much you spend on these as they may sometime exceed your revenue and then you would be making a loss. If all these figures are managed well it spells profit for your business. Revenue growth is something to be happy about, but it needs a lot of attention also.
The article mentions some of the improvements, one should keep in mind which enable you to make growth and profits. So ensure that you have all the key elements of success – and you can be sure to have a business that is both, prosperous and profitable.