In this World full of competitors, anyone owning a business should learn to achieve a satisfactory level of profitability. This requires focus on areas which are playing a key role in increasing the profitability of the company. Determining this area of focus will help the managers to create an effective strategy to increase the profitability.
Sales are the most important factor in determining the profitability of any company. Sales ratio after taxes determines the profit on the current year’s sales. Higher the sales, the better the company can handle the unfavourable conditions of market & economy. If you’re working to maximize your company’s profitability then it is essential that you should build up an effective Sales strategy.
Pricing plays a key role in determining the profit of any company. Any business owner must have a look at the prices their competitors are offering. It will help to maintain the profit margin within a unique price. Along with that another major factor that is needed to be taken into consideration is what price your consumers/customer are willing to pay? The customers would happily pay more for services or products that are not readily available.
A company’s profit can be determined by analyzing what is left over after excluding the expenses from total revenue. The expense is what company spends on resources which are used in company’s business activities. In order to make any business profitable, the expenses should not increase than the income.
The Cost of Staying in Business
A company which is seeking to increase their profitability should emphasize on the return on net worth. It should at least be equal to the rate a business can borrow money from its creditors in order to be able to pay the cost of staying in business. Even if a company is gaining profit but their return on net worth is low, it still lacks profitability.
Measuring profitability is the same as measuring any company’s success. An income statement is a great way to keep track of income & expenses throughout the year. Another measure of a company’s profitability is profitability ratio which analyzes the financial health of any business. It gives insights on how the profit was earned in relation to sales, total assets & net worth.