Four Steps to Increasing Profitability

By Kenneth Surbrugg, Director of the Center for Entrepreneurship at Missouri Southern State University

Benjamin Franklin once stated that without continual growth and progress, such words as improvement, achievement, and success have no meaning. Easier said than done in these trying times, but done it must be in order to survive.

If you want your organization to succeed and be profitable, try implementing one or more of the following steps in order to see your bottom line (profits) grow.

1. If possible, incrementally raise your prices. Raising your prices by 1%, while keeping your other costs stable, will generate a 1% increase in your profits. If a business has sales of $100,000, a 1% increase would be an extra $1,000 in profits – if you can keep your cost of goods sold stable and your overhead flat. Look at your inventory or the quality of service that you provide. Can you raise your prices by 1%?

2. Increase your sales volume. Increase the number of items that you sell and keep your other costs stable. Again, if a store sells $100,000 and then increases their sales volume by 1%, that would generate an extra $1,000 in profits – if you keep your other expenses stable. So how often do people buy from you? Are there ways that you can increase the sales volume and keep the costs of doing business stable?

3. Reduce your costs of goods sold. Can you negotiate a discount from your suppliers? Can you take advantage of any supplier discounts or price breaks in order to lower your cost of goods sold? If a company has a total cost of goods sold of $60,000 and you can negotiate a better price or take advantage of discounts of 1%, then that would translate into a cost of goods sold reduction of $600. Keeping all other expenses flat, that $600 flows right to your bottom line.

4. Reduce overhead. Look at your business expenses – what is necessary and what is not so necessary? What can you do to reduce your business overhead? Can you negotiate a better rate with your local insurance provider? Can you strategically plan your workday to take advantage of better utility rates? Can you negotiate a better contract with your marketing group? If your company has $30,000 in overhead expenses, a 1% reduction would be an extra $300 to your bottom line.

These might not sound like much in terms of dollars, but every little bit adds up. What if you raised prices by 3%, cut your cost of goods sold by 2% and increased your sales volume by 7%? That is an opportunity to generate an additional 12% in profits if you keep your overhead stable. Even if overhead increases by 5%, you still have a 7% increase in profits.

Review these steps to see how you might incorporate some, if not all, of these into your business. Profitability, after all, is the objective of this capitalist game.

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