6 Simple Steps to Improve the Profitability of a Small Business.

Understanding how to improve the profitability of a business organization is very important to every business owner or entrepreneur. However, most entrepreneurs believe that increasing revenue is the automatic way to make money for the organizations. The decision to increase revenue is only rational if it leads to an increase in the profit of the organization. This article explains different steps of improving the profitability of small businesses as follow:

Understanding how to read financial statements

The first step to improve the profit of your company is to understand how to read the key financial statements. The financial statements include income statement, statement of financial position (balance sheet), and statement of cash flow. Understanding these financial statements gives a clear picture of expenses as well as earnings of the organization. Also, it helps you to determine the pieces that can be controlled that will enhance your budgeting and efficiency.

Analysis of the business

Analyze the profitability of the business organization by analyzing the profitability of different areas of your business. These areas include individual business lines, products or services, geographical locations, and others. Because this draws your attention to the areas of the business to improve and those areas to maintain.

Determine the returns of the future projects

This involves calculating the profitability of future projects by using different methods of project appraisal. To appraise a project, methods of appraisal such as Accounting rate of return, payback period, net present value, and internal rate of return can be used. Accounting rate of return and payback period is known as a traditional method that doesn’t consider the time value of money while net present value and internal rate of return are known as a modern method which considers the time value of money.

Examine the available options

Examine the different options to improve your profitability by carrying out an audit of your expenses to eliminate or reduce the cost items on which you have control and eliminate any inefficiency in the operation process. So, available options may include the elimination of unprofitable products, distribution lines, or increase the selling price of the products or services.

Create and follow a budget

Then, select the best options to improve your profitability and create a budget to follow to improve the profitability.

Control

Continuously monitoring the actual results of the decision to determine whether there is any deviation from the budget. Therefore, the efforts are made to maintain favorable deviation and corrective actions are taken to control any unfavorable deviation.

Conclusion

To increase your profitability, it is important to understand both the marketing strategy and value of your company. Because it will help to determine the best options that will improve your profitability. However, a regular audit of your expenses is one of the simple and effective steps to improve your company’s profit.

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