Mehanna CPAs & Advisors | 199a deduction

How to Solve Profitability Problems

Profitability is always at the forefront of any business owner’s concern. According to the accounting formula, profitability is directly related to sales, in theory, the higher they are, the higher your margins will be. Because of this direct correlation, you should keep an eye on your revenue. 

In business, setting sales goals is a necessity because it helps keep track of your improvement. It helps you see if you are on track with your business goals and whether or not you’re hitting your profitability goals. Seeing your improvement will improve morale while detecting fall-outs will prompt you to investigate the root cause of the problem and change your business strategy accordingly.

Remember when we said that the direct correlation of sales to revenue is in theory? Exactly because this does not guarantee the desired increase in sales nor is it the only way to increase your margins. 

Problems in profitability include missed sales targets, or operational issues such as excessive costs, faulty pricing, or imperfect strategy. If your profits are skinny but your costs are increasing, your profitability problems could also be lurking in your business operation and you might want to revisit your pricing and expenses, or cut out projects and products that are not racking in expected profits but costing you more than most.

In this article, we give 3 tips to use in order to revive your business’ struggling profitability.

1. Revisit Sales Strategy

In today’s market, the trend of customer satisfaction is no longer lodged in the quantity of sale, but in the quality of the sale that hinges on meaningful relations with your client. When sales are low don’t automatically apply fail-safe marketing strategies. Instead, you can reassess your customers or projects and re-examine the market. 

Look at your financial data and identify the clients you have, and the projects you are handling. Look for the most and least profitable. Then you can focus your marketing efforts on the most profitable. Determine if you should cut off the least profitable.

From these gathered information, formulate with your team a new business strategy to stand out from your competitors.

2. Motivation is Key

Another way you can increase your sales is by giving motivation to your team through recognition and rewards for their success. Rewarding excellence will encourage the workers to put in additional effort.

Involving the workers in developing an operating framework that involves common goals allows the employee to feel a sense of control over the business’s long-term success and develops a sense of belongingness to the company.

Incorporating a reward system not only increases sales but it gives high morale and creates a positive workplace environment as well.

3. Incorporate a commission in your reward system

Monetary awards are one of the most straightforward ways to increase employee drive. Some methods for providing commission are the gross margin commission model and the net revenue model.

The net revenue model pays a percentage of revenue. For example, if you have a 10% commission, the employee will earn $100 for every $1000 sale.

On the other hand, the gross margin commission model pays a percentage of the gross profit earned on a sale. This means when you take out the commission your base amount already considered the costs involved in making the sale. 

Let’s say you made $10,000 sales and $1,000 profit. If you use the first method, the commission will be $1000, but the second method will only yield $100.  

Conclusion

If you want to learn more about increasing profitability, don’t hesitate to call us and set a meeting. Businesses all have unique circumstances and by reaching out to the right expert, you can meet your business’s distinct needs with the least effort and cost.  

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