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.
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.
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.
Afeez is one of the founding partners of Marasas Consulting limited. He consults for both individuals and entities in the area of accounting, management, audit, tax, and investment. He has a wide range of experience both online and offline which allows him to provide relevant and timely professional advice and assistance to business owners with their accounting, tax, management, audit, and investment plans.
Afeez is a member of the Institute of Chartered Accountants of Nigeria (ICAN) and a member of the Nigerian Institute of Management (Chartered). He is a certified Google analyst and strategist. He earned his Bachelor degree in Management and Accounting from Obafemi Awolowo University, Ile-Ife, Nigeria, and earned an ordinary national diploma in Accountancy from The Polytechnic of Ibadan, Oyo State, Nigeria. He earned certification in “Excel Crash Course” and “Reading of Financial Statement” from Corporate Finance Institute, Canada.
Afeez is dedicated to helping clients achieve business success by helping them to establish solid and sound accounting, tax, and financial processes.