If you’re looking for ways to increase your profitability, focus your attention on the four profit determining factors:
Price
How much you charge a customer for a product/service will obviously drive profitability. An increase in price may result in less sales but the resulting positive effect to gross margin may offset the lower volumes to drive greater profitability.
Volume
How much or how often a customer buys from you will impact profitability. If you can have your customers buy more, then you will have greater profitability as long as you maintain the gross margin on a per sale basis and control your fixed costs.
Variable Costs
This represents the cost to produce your product/service. A decrease in your variable costs will increase your gross margin and have a direct effect to profitability. The decrease in variable costs represents your ability to more efficiently provide your product/service.
Fixed Costs
This represents your fixed overhead that you incur to keep your business going. These costs usually are constant and don’t necessarily change due to volume changes in your business. It is important to monitor these costs and keep them under control but a decrease in fixed costs does not have the same ability to improve profitability as compared to price, volume and variable costs.
It’s important to note that profitability can be improved by either increasing or decreasing any of the four factors, as long as there isn’t an offsetting increase or decrease in one of the other factors. In fact, a proper profit improvement strategy would involve increasing or decreasing more than one of the four factors in a complementary manner in order to maximize the profit improvement.
As a result, a profit improvement strategy must focus on one or both of two things:
- Achieving a higher gross margin per dollar of sales by increasing price and/or reducing variable costs, and/or
- Achieving greater sales increasing sales volume and maintaining your gross margin
If you are interested in developing a profit improvement strategy, please contact Greg Clarke, Partner at (905) 633-6323 or by email at gclarke@sbpartners.ca
