Understand the Profitability Equation or Become a Statistic

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Many business executives and business owners fail to fully understand the key levers in their business for making a net profit. They often do not have a simple conceptual framework or model to organize their thoughts and create clear action plans. With a goal of making a healthy and growing net profit, the conceptual framework is both simple and easy to understand. In its purest form net profit equals your revenues (price*quantity) – your total cost (fixed cost +variable cost). These four levers are the drivers of the net profitability of your business.


Most business owners have not raised their prices in many years. There is always a concern that raising pricing will actually decrease your revenue. This is rarely the case and your most loyal customers will not respond negatively to a price increase. Conversely, customer buying behavior will rarely respond to discounting of less than 40%, a discount rate that will quickly liquidate your business. If your business delivers 4X the value, you can charge 2X the price of your competitors.


Selling more is a direct reflection of a well understood and quantified tactical marketing plan. Identifying your business’s target market and unique selling proposition will help create a compelling message. Looking at the intersection of market segments and products/services you can quickly understand whether the volume is increasing, decreasing or staying the same. Often it is a matter of picking those niches you sell well into and better understanding why. Pick your raving fans, understand their needs and give them more of what they want, not what they need.


Delivering profitability requires a detailed understanding of both your variable costs and your fixed costs. Start with understanding your gross or contribution margins and the key drivers. Often the critical areas to focus on are material costs and labor costs. Your materials costs can increase over time due to inflation, lack of strategic suppliers and inefficient manufacturing processes. Often your labor costs will increase due to unexpected overtime, poor set up routines and a skill mix issues. Either way, understanding cost data by product line and customer is critical to controlling them and maximizing the profitability of your company.


Understanding the key profitability drivers in your firm and having a plan to raise revenue and controls costs will ensure cash on hand and retained earnings at the appropriate level. This will require consistent monitoring and diligence in creating action plans with clear accountability. These are areas of expertise at OptaProfit and you can download my free report at Optaprofit.com or book time on my calendar for a complimentary coaching session at https://optaprofit1.youcanbook.me/

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