Controlling financials and motivating sales normally lead to increased profitability and cash flows. However, improving profitability is much more complex than such a linear way of analysis. Profitability that all business owners work hard to achieve, results from the surplus of revenue after paying all expenses during a particular term, e.g. one year. Thus, improving financial performance is mainly focusing on increasing sales, controlling operating and capital expenditures, improving productivity and efficiency and meeting customer needs. Inflated operating costs and poor sales drive a business into a default situation. I can segregate the factors of profitability into two main groups, namely financial and non-financial factors. The financial factors describe how a business makes profits and increases cash flows, while the business factors explain how an enterprise operates, sells and grows. In this article, I will discuss some steps to control costs and enhance enterprise profitability.
Control capital and operating expenditures
Investments and operating expenses have a direct influence on profitability, as they generally reduce profitability. However, capital and operating expenses are must-have resources for any enterprise to perform activities and reach milestones. Investments include the pre-business costs, working capital and fixed assets, and operating costs represent variable and fixed expenses. A business owner conducts a feasibility study to test business viability, determine investments and operating costs and project cash flows. Inflated investments lead to higher depreciation expenses that offset profitability, and deficiency in managing enterprise resources and operations will lead to higher operating expenses. Inflated operating expenses also lead to lower profitability and increase the break-even point, which increases the risk of enterprise failure. Controlling investments and expenses, coupled with increased efficiency and productivity, will increase enterprise sales and profitability.
Improve productivity and efficiency
There is no better advice than improving productivity and efficiency to increase enterprise survival. One reason for business failure is that the worker’s poor productivity and weak efficiency. Productivity represents the annual production quantity or value per worker, and it measures enterprise productivity. Enterprise productivity aligns with the approved benchmarks and targets, and the efficiency describes the turnover ratios of the working capital, assets, liability and enterprise equity. To improve productivity, a business leads and trains staff to improve capability, but the situation is much more complicated with improving the enterprise efficiency, as the latter requires influential leadership, improve operations, increase sales, eliminate wastes and get the best of resources. Increasing efficiency and productivity will undoubtedly lead to lower unit cost, higher revenues and increasing enterprise profitability.
Develop products that customers want
Any business exists to solve a major problem and meet customer needs; however, this mission is quite challenging to achieve, as due to the dynamic market and evolving needs of customers. As a result, enterprise management frequently conducts market researches to understand the market and customer needs and offer the wanted market mix. Failing to do so, this situation will flatten sales and harm enterprise profitability. Therefore, businesses make products and unique values that customers want; otherwise, they will be difficult to survive. A business that meets the customer needs, has a greater chance to grow and reach the economy of scale, which reduces unit cost and grows sales. Until then only the enterprise can sell more, reduce product cost and increase profits.
Invest in the right technology
A business can dominate the market and grow if only it invests in breakthrough technology. Advanced technologies are expensive, increase expenses and reduce profitability, yet it leads to higher efficiency and economy of scale, which offsets any technology cost. The technology comprises hardware like equipment and the software to operate the hardware, and it has a significant influence on how an enterprise operates, sells and makes money. The impact of technology is judged by its desirability, feasibility and viability. Desirability explains how enterprise technology can increase customer experience, meet customer needs and grow sales, which will lead to shining competitive advantages and increasing profitability. The feasibility shows how enterprise technology attributes to making unique products and values, and viability explains how technology increases profitability and reduces expenses. In sum, technology influences how an enterprise makes values, increases sales, encourage economies of scales, along with improving enterprise profitability.
The strategy shows how an enterprise makes values and sells in the medium term; therefore, any business pays close attention to develop and control its strategy. This strategic setup leads to the enterprise survival and growth, and strategy comprises aims, strategic positioning, initiatives, action plans, resources and key performance indicators. Enterprise management creates a strategy based on a thorough evaluation of the internal and external environment. Also, it focuses on the enterprise competitive advantages and the strategic direction and positioning, and it is then broken down into an action plan along with short-term targets and activities. Yet, strategic outcomes depend on the level of execution and control, where performances are monitored and aligned regularly to the set targets. One of the main advantages of having a fancy strategy is to enable the enterprise to meet customer needs and increase profitability, as through improving productivity and efficiency. Strategy and control system enhances customer experience, strengthens competitive positioning and increases sales, along with improving the enterprise profitability.
This article is extracted from my new book- Mastering Enterprise Skills for Potential Entrepreneurs, which can be found on www.amazon.co.uk. If you want to receive more information about the book and our activities, you can register in our newsletter by using this link.
Prepared by Munther Al Dawood
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