TOMAS deals from your suppliers. 11 Streamline your processes.

TOMAS BATA UNIVERSITY IN ZLIN

ESSAY

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By:  BSc Moses Kasolo
Email: [email protected]
Phone: 00260975508990

 

CONTENTS
CONTENTS.. 2
1.0        INTRODUCTION.. 3
3.0        MEASURING PROFITABILITY.. 4
3.1.       Gross Margin. 4
3.2.       Profit Margin. 4
3.3.       Operating Margin. 5
3.4.       Return on Assets. 6
4.0        STRATEGIES TO MAXIMIZE PROFIT.. 6
Sales Volume. 7
Change Operating Procedures. 8
Stay Visible and Connected. 8
Maximize Your Cash Flow. 8
Raise the Marketing Bar. 9
Make Everyone a Salesperson. 9
Increased marketing and price
discounting to increase quantity sold. 9
Cut
out unprofitable products and services. 10
Outsmart
your deadbeat customers. 10
Better
deals from your suppliers. 11
Streamline
your processes. 11
5.0        CONCLUSION.. 12
6.0        REFERENCES.. 13
 

 

 

1.0 INTRODUCTION

.

“Profit: is defined as the
difference between the cost of goods or services and revenue generated” while
profitability is the efficiency of a company/organization to generate profit.
Increasing profitability is the biggest goal for business owners if their
businesses are to survive the test of time. To achieve profitability involves
close and constant analysis of all business activities even those aspects
within the business often deemed as minor. There are many strategies that can
be implemented in order to increase profit which normally depends on the kind
of industry, business, services and products etc. This essay outlines a few
strategies generally implemented by successful companies despite product or
services. In this essay both internal and external factors are rampantly
illustrated as means of increasing profitability of a firm

 

 

3.0 MEASURING PROFITABILITY

 

Gross Margin, Profit Margin, Operating Margin and Return on
Assets are the means of measuring the profitability of a firm respectively
highly useful only if a firm can use the data to affect positive change in its
operations.

3.1. Gross Margin

 Determines how profitable an organization is when selling
its merchandize or inventory. The ratio of gross margin is provided by
comparing the gross margin to the net sales of a company, The gross margin
ratio is also the percentage markup on inventories from their cost, By dividing
the gross profit by net sales for example a company with the cost of goods of
$80 000 and the net sales of $140 000 hence the company will have gross profit
of $60 000 which is the amount calculated by subtracting the former from the
latter. By dividing the gross profit ($60 000) from the net sales ($140 000)
gives the ratio of the gross margin which in this case is (0.4287 as a
percentage 43%) the larger the percentage the more profitable a company should
be hence gross margin ratio affects profit directly.

Gross Margin = Gross Profit
/ Net Sales

 

3.2. Profit Margin

 Is one of the profitability ratios that is calculated the
division of net income from revenue or the division of net profits from sales.
Net Income or Net Profit is calculated taking revenue and subtracting the cost
of doing business i.e all company expenses which includes material costs,
operating costs, Interest, taxes, etc. Profit margins are usually expressed as
a percentage of how much of each cent a company makes from sales is kept as
earnings for example taking a sale revenue of $80 and $20 net income means the
company has earned a 25% profit margin is calculated as follows:

Profit margin = Net
Income/Sales Revenue

A larger profit margin means
that a firm or organization is more lucrative and has a better grip on
operations. Profit margins hence. Though profit margin has simplicity on its
side it is usually used by firm as a secondary profitability ratio because it
contains expenses and income that are not directly related to the firm’s core
business. However it is a very useful financial metric as it helps companies
determine how they vary against their competitors

 

3.3. Operating
Margin

 Is also one of the profitability indicators, it denotes
how much of sales revenue is left after the operating expenses and the cost of
services or goods are considered. Hence the operating margin is calculated as
follows

Operating Margin = Operating
Earnings / Revenue

How it works , if a company
has 300 in operating earnings and 1200 in revenue considering the formula above
300/1200 = 0.25 or 25% this is interpreted as for every 1 Crown made the
company makes 25% in operating margin

To efficiently calculate operating
margin understanding operating earnings (oe) is very crucial, oe is equivalent
to revenue minus the cost of labor, goods, services and all day to day expenses
during normal business period. However, Operating Earning typically does not
take into consideration non-recurring business activities such as one time
business transactions, legal judgments, accounting adjustments and all other
business transactions that are not central to the core of the business

Operating margin is affected
by several factors such as prices for labor costs, prices for raw material and
pricing strategy these activities are all central to the core of the business
relating to day to day managerial decisions. As a result operating margin cam
measure the competency and flexibility of a manager specifically during tough
economic times. It is advised that when comparing operating margins between
companies it is best to consider that industries have higher material and labor
cost than others hence comparing within the same industries is yields better
results.

3.4. Return on
Assets

Determines a manager’s
ability to generate profit when using corporate assets, the higher the return
on assets of a company the more it can make utilizing less inventory, equipment
etc. Companies derive their annual income from using business assets in a year
period all are inclusive regardless of when they are added during the year.
Hence return on assets is calculated as the ratio of net income to total
assets. The formula written as follows

Return on Assets = Net
income/ Total assets

To increase the return on
assets companies can either decrease total assets or increase net income there
is a number of ways to do that for example by raising the price the price of
services and products while maintaining demand. Increasing sales volume by
better training the sales force or through marketing, outsourcing to third
parties non vital business functions may help to implement a more lean business
model. The business landscape today’s era demands that companies increase their
profitability level from sufficiency to efficiency.

 

4.0 STRATEGIES TO MAXIMIZE PROFIT

 

The Market economy runs on
the life blood of profits hence achieving a sufficient high profit level is
central to sustaining business growth in the long run. Primarily most
companies’ focus on reducing internal costs in this chapter many aspects of
increasing profitability such as 
boosting sales volume, pricing, effective  marketing all levels of brand building in
order to retain customers.

 

Sales Volume

 All profit making businesses to survive rely on revenue
generated from sales. Unfortunately about 70% of sales team fail short to reach
their targets in a quota. Developing an efficient sales process to yield a high
quality sales force can help organizations increase sales revenue effectively.
There is a number of ways to getting an efficient sales force. Firstly,
internal communications is highly beneficial because it is the core of all
effective sales team as it allows resources and time to be utilized more
efficiently, effective internal communications averts potential problems among
leaders and their subordinates within the organization

Technology has a significant
increase in the efficiency of the sales team thereby increasing sales revenue,
Hence introducing applications like advanced Customer relationship
management  (CRM) for example the sales
force’s community cloud provides an organization members, partners,
customers and others an online platform for them to interact, gain access to
data, troubleshoot and make communities.

 CRM additionally facilitate clear flow of
information within an organization and consequently increase customer
satisfaction. Statistically firms that have excelled at the use of analytical
tools (CRM) generate an estimated 50% more sales and ready leads to be
converted a 30% lower costs. Evidently the use of CRMs gives a much better
picture if each step in the sales funnel while promoting B2C and B2B lead
generation.

 

Change
Operating Procedures.

In order to increase profit firms needs to reduce expenses while
generating more sales.  Cross selling is
a technique firms can use offering new products and services that complement
current offerings. Such as selling drinks to bread. Firms can also switch to a
relationship based sales model that ensures clients coming back such as
offering monthly or yearly service plans like gym membership 0r bundles of
visits at discounted prices. Operating procedures such as incentivizing new
customers to try new services with special offers such as giveaways and
discounts

On the other side auditing a firms administrative functions to
trim expenses such as routine tasks that could be outsourced or eliminated in
order to save money. Firms need to analyses their operations weighing in on
whether it’s more effective to hire part time or full time employee to
accomplish some tasks

Stay
Visible and Connected.

Certifications, licenses and Accreditations,—for a firm or
individual employees—can set a company apart from its competition. A firm needs
to its reputation online,
using its website, a blog and social media page to connect with customers and
make strategic alliances with companies that share the same values and
ethics.

Taking advantage of affiliate marketing’s should be every firms
goal using the tool to drive new clients to its site while eliminating
ineffective, stale alliances that may be a drag. Both Large and Small
businesses needs to leverage referral selling and use advertisement to share
with complementary businesses as this ultimately drives more awareness and
leads to acquiring more customers.

Maximize Your Cash
Flow. 

There many ways to achieving a stable cash flow and one of the
best ways to offer on-going payment plans for your clients or prepaid
retainers. For example, instead of a one-off consulting contract of $130 per hour
for a whole day. A firm can tweak its offer and give its clients a discounted price
of $100 per hour for the consulting more than 12 hours. Even though, the hour
fee will be reduced a firm will be billing a greater total fee amount
additionally locking a client into an on-going relationship.

This may not appear lucrative at first. But this establishes
relationships and keeps open doors for additional work opportunities. Offering
maintenance contracts for service based businesses are another way to create a
new revenue stream

 

 

Raise
the Marketing Bar.

In old times networking used to be all about handshakes and
cocktails in nowadays immediacy has given it a whole new image. Giving
businesses an instant presence through online networking including Twitter,
Facebook, YouTube and LinkedIn

Setting up sales presentations, Group Meetings and special
promotions using webinars .Offering tutorials, new certifications sessions and
demos, webcasts or podcasts for downloads immediately. Helping to measure all
marketing efforts and to see the ones which are cost effective. Firms do this
with Customer relationship Management CRM software’s like salesforce, ZOHO CRM
linked to your accounts receivable systems.

Make
Everyone a Salesperson.

From mail to telephone to face to face meeting, every individual
employee is vital he/she has the opportunity to spread your company’s message
and participate in potential sales generating behavior. Every employee needs to
pitch in and help, cutting costs, networking, selling and marketing.

Executives needs to get their employees invested and highly
motivated to sell the message by encouraging self-development through
conferences, lunch meetings, roundtables and webinars through this a firm can
be well on its way to building an organization focused on increasing profits It
pays dividends rewarding employees that seek to continue education making an
extra effort to represent the company inside and outside work

 

Increased
marketing and price discounting to increase quantity sold.

Increased
sales volumes = Increased total revenue, assuming that the selling price is constant
or slightly lowered lower prices are directly depends on elasticity of demand,
total revenue may actually fall if price has to be reduced to achieve higher
sales volumes .The business supply capacity to sell more depends on the price
elasticity of supply.

Utilize
Production capacity (i.e. fixed costs should not rise) Competitors are likely
to respond – bringing some game theory as an answer. Sometimes Marketing
efforts fail – e.g. when promotional campaign are not generating results. Fixed
costs may actually rise as a result higher marketing costs to drive higher
sales.

Cut out unprofitable products and services
today, it is easy to find
businesses that are selling services and products that are not making any
profit at all that’s right .no profits at all.

A wake-up
call to company management is realize which 
announcement is easier to make, telling their employees that the
business will close due to lack of profit or telling them that the company will
not be making unprofitable products or offering unprofitable services

Companies
especially small enterprises tend to keep products that they are commonly known
for simply because of their fear of losing their brand image. Managers must
focus more on the products that are constantly yielding profit.

Outsmart your deadbeat customers

There
are two main customers businesses must constantly watch out for: The slow
payers and the no-payers. It is foolish for firms to assume that all customers
will pay the bills on time. The longer a customer takes to pay the more time
and money a business loses in the chase. It is highly recommended for
accountants to only count when checks clear rather than bounce.

A down
payment before starting any work or before buying supplies has always been the
best way for service-oriented firms to stay ahead of collection. To reduce nonpayment
risks product sellers can start by not accepting large first orders from customers
that are unproven. A common practice by troubled companies is to over order
services and supplies from eager small companies that will do anything to make
a sale. It is much harder to brush off a friendly face. Hence getting a
collection agent significantly increases payments as compared to collection
letters. One doesn’t not need to have MBA to build a “Large” and
profitable enterprise All one needs is willingness and determination to be
selective in what one does, who one serves, and how fast one gets paid..

 

 

 

 

 

 

 

Better deals from your suppliers

Companies must identify the
key areas of expenditure. By identifying the key areas of expenditure will also
show where the firm spends most of its money. Firms must regularly shop around
or try bargaining with suppliers, asking for a reduced or discounted prices as
a result of early payment.

Negotiating with suppliers
is much easier when there is a regular trade off. A company can use its status
as a valued customer to get an agreement for a long term contract or rather an
annual minimum spending with many suppliers to negotiate prices. A firm can
also use the option of buying as a consortium with businesses in similar
fields. If a business can’t get the best deal it is important remember that the
option of switching suppliers is always on the table.

Regular review of the number
of suppliers is vital, sometimes buying from too many suppliers is ineffective
and inefficient as this practice tends to dilute buying power. While on the
other hand have few suppliers could lead to vulnerability in case of something
going wrong.

Streamline your processes

Regular brainstorming on whether there are other ways to
reach a firms goals is not a bad thing. A firm can produce a particular type of
product or introduce a new service brainstorming on the specific time to launch
which week, month or year to launch attending to questions like cash flow, invoicing
and shipping.

It’s useful to know how similar businesses have approached
the launch of a similar product or service the practice commonly known as
benchmarking. On the surface benchmarking can be for example comparing costs
between products and services of similar businesses or more detailed such as
sharing analysis productions, data and stockholding behavioral patterns with other
businesses especially partners.

Additionally benchmarking offers a clear perspective in
offering momentum and new ideas to make the business more efficient. When
benchmarking it is vital to focus on the KPI already identified. Even though,
there is no standard template firms can take the following steps:

 

Brainstorming and Benchmarking
helps in the decision making on the areas a business a company should improve,
through research techniques such as conversations with customers, surveys,
quantitative research and questionnaires

Researching the companies
that have similar operation processes you want to introduce. If for example
introducing Integrated IT System, you could find other firms that are currently
in using the system

Locating the businesses that
are profitable in the same industry of interest through benchmarking, this can
especially be done through customer consultations, trade associations and
suppliers.

Surveying companies for their
practices and measures to identify businesses processes alternatives. If a
business of interest in unwilling to assist with information. Trade
associations also have commercial market reports available to the public.

 

 

5.0  CONCLUSION

To make profit sometimes it is a matter of changing or
implementing something obvious in a firm that can provide an instant shot in
profit for the firm. However, more often increasing profitability is about
putting up a firm foundation. Ensuring long term improvements. This essay has
outlined and examined some of the ways a firm can improve its profitability in
both short and long term. Staying vigilant in all business areas ensuring
operation excellency is the one way that constantly stands out for a firm to
stay profitable as all opportunities are utilized while at the same time
cutting costs.

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