Preface: The top priority of any well managed business must be the balance of profitability on sales revenue. Does the sales and marketing plan to increase profitability make sense, i.e. will it secure and further future success and revenue profitability, or is it a revenue spangle?

 

Business Profitability and $$ Kernels!

 

Most managers are familiar with the profit kernels that lead to increased business profitability 1) reduce expenses 2) increase sales volume 3) raise prices 4) increase capital leverage 5) increase product stocks 6) increase distribution radius with multiple locations or e-commerce and 7) adding new products or services.

 

As a manager you may think frequently about new profit kernels that increase efficiency and therefore profitability for your business. You can systematize your assessment of financial performance with ratio’s and analytical contrasting as you review financial statement periods, but what you should really want to do is gain a realistic familiarity with how you can cultivate profit kernels to manage a consistently profitable business and increase retained earnings along with valuation.

 

Increasing sales volume is often thought of as the easiest way to increasing profitability; but it may not be easy, and it is not effortless. Simply, sales does not always equal profit. If you increase sales, you may need to increase capital requirements, along with forecasted increases in overhead, selling costs and general and administrative costs. If you need to employ additional sales reps to produce additional sales you must carefully consider the cost/benefit.

 

Profit Kernels

 

Organic profit kernels, e.g. incremental expansion from the reinvesting of operating profits to build your business, increases your business’s long-term financial balance and should be preferred to hybrid profit kernels with significant risk, e.g. building your business with credit leverage. Don’t venture your business’s future security, for the possibility of more income today.

 

If you reduce prices to increase volume, each sale will result in lower profit. Even with increased volume, your net income may decrease as you need to increase overhead to handle additional sales volume.

 

Boutiques

 

Sometimes the most advisable way to increase profitability, for a retail business, is to decrease sales and raise prices to focus on the type of customer and client that provides the majority of your net income e.g.  A boutique business. If you use analytical contrasting on individual sales, you may find that 50% of your sales result in only 15% of revenue. According to researchers, you could probably do 50% less work and earn 85% of current income if you boutique your business. The golden nugget here is developing quality profit kernels, i.e. develop the kind of boutique clientele that achieve your goal of increased profitability. You can determine this from analytical sales contrasting.

 

Capital Management

 

Wholesale and retail businesses should look primarily at earning a good return on capital: improving capital management with tighter credit controls, calibrated inventory levels, and stock management efficiency.

 

Remember, the priority of any business must be the balance of profitability on sales revenue. Does the sales and marketing plan to increase profitability make sense i.e. will it secure and further future success and profitability, or is it a revenue spangle?

 

To summarize: carefully consider your profit kernels and the long-term risk and rewards of implementation. If your business is subject to legislative policy and rulings, obtain advice from trusted advisors who can help you assess the impact to your business. Most importantly, don’t underestimate the intangibles in your business and their contribution to increasing profitability, e.g. quality customer and client service and your businesses integrity in the marketplace.