Net profit is what is left of revenues after deducting all expenses. It is also called net income, which is gross income less expenses, including taxes and insurance, but before depreciation, additions to reserves or distribution of earnings.
Net profit is a gauge that indicates the quality of business results over a certain period. It is the index that tells whether a company has the financial capacity to meet current and future business requirements, profit being the most important life-giving element of any business. Net profit also signifies the relative attractiveness and viability of a particular business.
Let us now discuss the key measures you need to undertake to improve your net profit:
I. KNOW WHAT IT TAKES TO IMPROVE NET PROFIT
In all your plans and actions for the business, always remember the fundamental profit formula: PROFIT = REVENUE – EXPENSES. In the context of this formula, your net profit can improve through any of the following permutations:
1. Increase revenues, and increase expenses (at rates lower than revenue increase)
2. Increase revenues, and maintain expenses
3. Increase revenues, and decrease expenses
4. Maintain revenues, and decrease expenses
5. Decrease revenues, and decrease expenses (at rates higher than revenue decrease)
As a good operating practice, you should manage to perform within situations I.1 to I.3. Increasing revenue, which demands continued productivity, is the central source of power every business owner must possess to bring the business to its next-level.
In today’s uncertain and difficult times, avoid being in situations I.4 and 1.5. It is a lot harder to manage costs now without crippling your competitive capacity. And if you have no revenue buffer to draw from, you will likely encounter business-building difficulties if you cut costs or hold back your business spending in untimely manner.
II. KNOW THE SOURCES OF REVENUES
With your clear understanding and appreciation of the profit formula, and its situational implications, the next thing that you must do is to study the behavior of your revenue inflow by segmenting your sources of revenue. In this exercise, you can ask yourself, and correctly answer the following questions:
1. Where do my revenues come from? (e.g. break down your total business volume by markets: household, individual, institutional, or private or government, or local or inter-state)
This should give you an idea which markets have been contributive to the expansion of your revenues, and which markets you should focus and strategize on to increase your existing business knowing the comparative demand levels of the markets you serve. If, however, you do not exactly know at this time the “what, where, why, and how” element of your revenue stream, then you may have to do a lot of catching up to have the ability to jumpstart your profitability.
2. What is my present average revenue per sales employee? Does my actual performance show any appreciable improvement? How does it compare with goal?
This should update you on whether or not your sales organization is at par with business objectives, and who among your salespeople needs some training, empowerment, or sanction. The idea here is to let your sales employees internalize the importance of consistently meeting sales goals; again, sales productivity being your key to a sustainable revenue growth.
3. Who are my biggest customers in terms of revenue share? (e.g. listing down the top 20% customers that may be giving you 80% of the total business – Pareto Principle)
This should tell you who are the customers you can rely on and invest in, accounts that could give you business vitality and sustained profitability. These are the accounts where you can pour in your best resources to delight and motivate them in giving you repeat business and, at best, lifetime patronage and loyalty. Satisfied customers are your best sales ambassadors, their testimonies always wielding strong persuasive effect among new prospects. Keep them and your revenue will increase exponentially.
4. Is there any other product or market segment that I need to include in my portfolio to generate incremental revenues?
This should enlighten you on the prospect of new demand that can give you added business and heighten your revenue performance. This could be a product or market within your competency to effectively carry or serve, but you were not able to do so either due to oversight or for some personal or business reason. Now is the time to rethink, assess, and decide on a strategy of product or market development in order to grow your revenues.
III. DEVELOP A REVENUE IMPROVEMENT PROGRAM
Knowing your four (4) key success factors for a solid revenue ramp-up, you can now quickly design and implement a revenue improvement program. This program must match the compelling needs, wants, and expectations of your key customers, including the incremental markets that you might decide on covering.
Whatever revenue improvement program you have in mind, it must start with developing a market-responsive price positioning platform. Your unit selling price multiplied by your total sales in number of units determines your total sales revenue. But the number of units that you can sell is a function of your selling price (i.e. price elasticity of demand principle). If your price is beyond what the market can afford, even a marketing genius cannot help you catapult your sales. You cannot price your product too high for “revenue and profit” sake. And you can neither price it too low for customer’s sake; otherwise, you are on your way to a business cessation.
If your pricing is predicated on reality, your revenue program should not cause you to financially bleed. You can stay on the side of simplicity and quality to support your pricing strategy, basing your actions on intensified sales prospecting, consistent sales force productivity, and straightforward customer care gestures.
The simple yet effective actions that you can do include: repeat referrals from satisfied customers, enhanced warranties, loyalty awards, friendly and courteous front line employees, motivated salespeople, teamwork, same-day response time, special price premiums or long-term supply contracts with top 20% customers, customer day events, special customer greetings program, customer bulletins and updates, convenient customer access, and money-back guarantees (if necessary).
If your revenue improvement program includes the offer of a new product, be sure that it is: of distinct, innovative, and superior value, known to all customers and key prospects, practically free from defects, and with well in place after-sales service.
IV. SCALE EXPENSES WITHIN COMPETITIVE PROVISIONS
With a water-tight revenue-building program, you should then have the patience and care in identifying the major cost components in conducting your business, in the same manner that you have studied your revenue sources. Your basic guide in this exercise is to manage and contain your total cost below your total revenue and to a level that will not prevent you from spending for the essential requirements of the business. There is always a limit to cost reduction; and beyond that limit, is a malnourished business organization without the capacity to compete and move on.
It is best that you be guided by the following prescriptions in cost management:
1. Manage and reduce your cost of goods sold.
Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold by a company. The COGS includes the cost of the raw materials and the direct labor costs used to produce the product, but excludes indirect expenses such as distribution costs and sales force costs. The COGS appears on the income statement and can be deducted from revenue to calculate a company’s gross profit.
You can reduce your COGS by negotiating price-friendly concessions from suppliers, requesting volume-based price discounts or long-term supply price protection. You can improve on your direct labor costs by being vigilant on workforce productivity and quality, implementing correct processes, and avoiding production rejects. A good COGS result raises gross profit level that can let you comfortably absorb operating expenses, and produce a good net profit picture.
2. Spend wisely on your operating expenses, especially on major items.
Be prudent in your business spending. Maximize utility for every dollar you have to spend. Streamline all expense items, giving greater attention to major expense categories. Look at your manpower provisions (outsource if you can save without sacrificing quality), rationalize your salaries and benefits (performance-driven incentives), tone down marketing expenditures (more on tactical and less on strategic campaigns), adopt need-based purchasing policies, and install at least post-transaction control mechanisms.
V. COMPLY WITH LAWS AND REGULATIONS
Good and profitable businesses thrive on legitimacy. Be legally compliant. Avoid costly case litigations. Shun short-cuts and expedient actions that can create adverse cost burdens and serious profit repercussions. In essence, LEARN TO PROFIT WITH HONOR, it begets new profits and renews business capacity.
In less technical terms, improving net profit embodies the discipline of knowing what it is, where it develops, and how it can be made to happen. It comes as a fitting reward for doing good business — no more, no less.
