Where does our profit come from?

What is business profit? ‘The easiest way to explain profit is the income a company earned in a certain period of time.’

Where a lot of new businesses seem to get it wrong is understanding what a company’s profit is truly made up of. What percentage of the profits does a company rely on certain products or division of its business?

You may think you know this, but you may be surprised. Do you know which customers give you the most profit? Or which products? Do you know which 20% of effort drives 80% of your financial results?

Find out which parts of your business are bringing in good profits and which are not. Which of your customers bring in the most value to your business? You can then focus on your most profitable clients and look at how you can expand the services and products you sell to them through diversification or cross-selling. Look at your competitors and ask whether your product is fully competitive and if your service is of the highest quality in the market.

Review your pricing structure and ask whether you are charging as much as you could be for your products. Know the profitability of each of your sales. Profit is not the same as cash or sales, and it's not the money in the bank or on hand. Profit is represented 'on paper' in your accounting system. Make sure your accountants produce profit and loss accounts for monthly management meetings.

To be more profitable you need to understand the concepts of profit margins and profit drivers. You can then develop strategies to increase your profits, including ways to increase your sales revenue and decrease costs.

How do we improve profit?

Once you have identified and measured your key profit drivers, you should develop strategies to grow them, without increasing costs. Making your business more profitable involves looking at ways to increase sales revenue as well as decreasing your costs.

You should also prioritise the strategies you've chosen to improve your profit so you can focus on the most important ones. So let us look at some strategies to increase sales revenue.

Increase staff productivity - recognise and reward staff contributions with staff and teach them sales skills. Develop new product lines - survey your customers about new products. Find new customers - new customers can help grow your business.

Find new markets - use market research to determine if you could expand your business into new areas. Customer service - improve your customer service and develop a staff training program. Increase your prices - check if you have correctly and if you could increase prices without reducing sales. Price discounts - consider price discounts and promotions to increase your customer base (e.g. 2-for-1 deals or happy hour).

Profit is the positive financial gain your business makes after you've subtracted all your expenses. The ability to generate profit is crucial to the survival of your business. It is about more than just making money - it's also about the ability to grow your business in the future.

W. Edwards Deming said – “Profit in business comes from repeat customers, customers that boast about your project or service, and that bring friends with them.