Improving Profitability Isn’t Easy, But it Can Be Simple
Regardless of what you generate from all your sales, whether thousands yearly or even millions monthly, your business simply won’t survive when you consistently fail to break even. Many entrepreneurs like yourself may have found it difficult to improve profitability or substantially maintain it. Well, it’s less complicated than you may think and it all lies in understanding and improving your margins across the board. But what are these margins?
- The Net Margin
- The Operating Margin
- The Contribution Margin
Understanding Your Net, Operating, and Contribution Margins
Net margin is the percentage of revenue you keep as profit after deducting all your fixed and variable costs. It is the comprehensive big picture everyone looks at, the metric that you compare with industry standards to determine whether you have a competitive advantage or not.
Now, although your net profit proves to be the ultimate metric, your operating and contribution margins comprise the tinier details you have to focus on to improve profitability.
Your operating margin represents the revenue you have left after deducting your operating expenses. Operating expenses here include the cost of payroll, rent, utilities, insurance, and marketing to mention a few. These are the expenses that keep your business running.
On the other hand, your contribution margin is the percentage of revenue left after deducting all your variable expenses. Variable expenses are the cost of raw materials, commissions, and shipping, among others that grow in direct proportion to your production volume. The more you produce, the higher your variable expenses get.
How You Can Improve Profitability
Where many business owners get it wrong is placing more focus on increasing revenue, the success of which can depend on external factors. Your business could be increasing revenue three times over each and every year, but if your expenses are increasing even more than that, then you’re potentially in trouble.
In order to increase margin, a company must then focus on what it has direct control over — its expenses. You improve your operating margin by leasing a cheaper workspace, reducing your workforce, and minimizing waste. You get a better contribution margin by finding cheaper suppliers, negotiating discounts with existing suppliers, and finding cheaper means of production.
While cutting down expenses to improve profitability, however, you don’t want to sabotage intangible assets like your customer perception and employee satisfaction. This is where the ice gets thin, and, at this point, seeking expert help becomes the best and most crucial step to take.
At AMB Performance Group, we have business coaching professionals who have vast experience in business systems auditing, helping you seamlessly improve profitability, sustainability, and growth. Is your business operating at maximum efficiency? We can help you find out. Contact us today to get started on securing that competitive advantage in your industry!