How to Increase Business Profitability?

How to Increase Business Profitability?
Published on: February 08, 2024

Preparing a business for an Initial Public Offering (IPO) is a complex process that involves various factors, and increasing profitability is certainly a key aspect. Here we have discussed some strategies to enhance profitability and make a business more attractive for IPO preparation. Hence, companies can prepare themselves for an IPO in 2-3 years in guidance with professionals to achieve their goal of raising funds through the primary market.

A - Identifying the Key Performance Indicators (KPI) -

The four primary types of performance indicators are profitability, leverage, managing cash flows and liquidity and last but not the least efficiency of business operations. It is important to select relevant KPIs and consistently monitor them to gauge financial performance to identify any deviations and implement timely measures effectively to enhance these KPIs.

Let’s discuss these KPIs in detail:

1- Profitability-

EBITDA margin, Net margin, Product wise profits and measuring segmental profits (region wise) are some of the profitability indicators that can help in identifying any low profit areas and thus can be rectified timely. 
Net margin ratio is significant as it shows the ability of a business to generate profits after meeting its expenses. A strong net margin ratio is important as it is directly linked to the valuations. A higher net margin ratio fetches good valuations for a company depending on the sector it operates in.
Measuring return on Investments (ROI) assesses a company's ability to generate profits for shareholders on their investments. A strong ROI infuses confidence among the investors about the returns a business can generate for their investments in the long run.

2- Managing Cash flow and Liquidity-

Liquidity measures whether a company is able to pay its short term obligations from the cash it is generating from its business. The company has to have an optimum working capital cycle to manage its cash flows. One has to keep the following things in mind to manage cash flows effectively:
Customers' payment terms have to be matched with the vendor's terms of payment. Quicker collection would generate sufficient cash flows. Discounts can be offered for early payments and one should have access to short term credit in cash crunch times like bank OD. 
Peak season in a business needs to be identified which can reveal the months of maximum sales and down sales. Identifying the peak, static and low seasons will help in planning for cash outlays.
Any outdated inventory has to be identified and sold at discounts and further planning to be done to avoid stocking excess inventories.

3 -Efficiency- A Company needs to continually identify the efficiency gaps and identify any business process that can be automated to save cost and thus improve business efficiency. It is advisable to leverage technology to automate processes, boost efficiency, and unlock potential cost savings, which could lead to increased profitability.
Certain business operations can be reevaluated and updated for efficiency. Costs like transport costs, use of middlemen, extra employees, overdue invoices, rented equipment payments, stocking up on materials when tariffs are low and potentially asking vendors for a break are some of the areas where timely decisions can improve business efficiency. Outsourcing certain operations can also prove to be cost effective.
It needs to be highlighted that as the economy changes, business strategies need to be modified too. One has to always look for ways to improve the product and invest in smarter solutions.

4 -Leverage- Leverage is the ratio that measures the use of long term debt to equity in a company. A company has to be cautious that it doesn’t resort to larger debt financing as higher finance costs can put a pressure on its margins. 

B - Collaborative Ventures-

Other than the organic growth of a company to enhance profitability through monitoring the key performance Indicators, a company can look for collaborations and tie-ups with other businesses to expand customer reach and become more diversified; thus driving future growth. These ventures can improve the profitability of the company but this option needs to be thoroughly analyzed as collaborative ventures often come with costs and may take time to generate profits in the short term.

To conclude, it is imperative for businesses to choose such financial management practices to optimize cash flow, reduce costs, and improve overall financial performance. Adopting such practices is a progressive step for any company.

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