Whether little or large, old or new, profitable companies all share the same goal; success. The one standout indicator of success is profitability. If you search hard enough, you’ll find instant success stories from companies who made an early profit and never looked back. The reality is that these cases are extremely rare. For companies to reach a stage of making a steady profit, it often takes years. If they’re struggling to turn a profit, it’s essential that they reevaluate their business knowledge, strategies, and tools.
Companies carry different expectancies based on what they’re trying to achieve and who they’re up against. Regardless of these expectancies, it’s essential that they measure their level of success through metrics. Brex reviewed the following percentage of profit margin that can reflect a company’s level of success:
- 5% is a low profit margin
- 10% is a healthy margin
- 20%+ is a high margin
As of January 2021, a New York University report found the average net profit margin across the USA was 7.71%. Despite many companies cutting costs during the COVID-19 pandemic, the current inflation means that this statistic could still fluctuate regularly. A profitable company will face new challenges to comply with ever-changing government regulations, which can directly affect profits due to higher outgoings. Despite this, the traditional methods of making a profit should ensure a company is maintaining profit growth year on year.
In this article, we discuss key factors in running a profitable business.
A Clear Business Plan
A company with a succinct business plan is guaranteed to succeed more than a company without one. A business plan highlights many different marketing, financial and operational aspects that are important in giving the company direction. They focus on the growth of a company over a given period of time, outlining goals and how the company intends to achieve them.
Company growth requires investment, which means profit margins will lessen for a period of time. Regardless, the intention of growth is to create a higher profit margin in the long term. This emphasizes the drive a company has in making more profit. Strategic alignment guarantees a company can become more profitable, generate cash flow, invest in growth opportunities, and bring new products and services to the marketplace.
You may believe you are ready to operate in a market without the clear focus of a long-term goal. However, a business plan will ensure you manage change effectively and foresee any new developments, allowing you to adjust accordingly. With a well-executed plan, you’ll be on track to making some healthy profit in no time!
Analysis of Your Competitors
A good business plan will contain a competitor analysis. The advantage of a competitor analysis is the knowledge of how to emulate your competitors’ success and avoid their failures. Being proactive will allow you to gain an edge and may lead to you discovering a gap in the market. To ensure continuous profit, you need to formulate a strategy that defines a better product or service than your competitors. Above all, you must be ready to react to market change.
One of the fundamentals of this process is establishing benchmarks of your competition. However, it’s important to confirm that your targets are realistic. For instance, it wouldn’t be wise for a new computer software store to immediately attempt to compete with Microsoft.
Persisting to outperform your competitors is the key to ensuring that they don’t monopolize the market. If a market becomes monopolized, it means that a singular dominant company will exert entire control. This can have a detrimental effect on the profit levels in which other companies can reach. Google is a great example of a monopolized market, as they have acquired 91.66% of the search engine market worldwide. The two distinct reasons behind Google’s rise to the top is their growth of essential services such as Google Maps, Mail, and Sheets. As well as their ability to identify other niche opportunities in the market before their competition.
This shows how important it is for a company to do a competitor analysis. It ensures they maintain control of their market and allows them to be reactive or take initiative when needed. Otherwise, they will lose market share to their competitors.
An Invested Workforce
The workforce is the beating heart of every company. It doesn’t matter how many hours the CEO or higher level of management dedicate, without a well-managed workforce it’s difficult to achieve long-term goals. A recruitment process that is strategically aligned with the company vision is vital. It guarantees only employees who uphold the company’s values are hired.
When an employee knows that their financial needs will be covered, their next step is to work for a company based on the people that work there and the company culture. Building a good culture goes a long way. Profitable companies consist of individuals invested in generating success. You can check out our other blog post on how to improve employee engagement here.
Based on a Gallup survey, companies with high employee engagement rates have 20% increased productivity and 21% increased profitability. However, only 15% of full-time working adults are engaged and happy with their work. The statistics imply that many companies fail to recognize the importance of keeping their workforce happy, and how this can directly affect their profitability.
The below factors are recognized as key drivers for employee engagement:
- A caring manager
- Ongoing conversations
- A focus on strengths
As Richard Branson, founder of multinational conglomerate Virgin Group famously said:
“Clients do not come first. Employees come first. If you take care of your employees, they will take care of clients.”
Is Your Company Profitable?
It’s clear that in order to make a profit, the product or service you provide must be more than the amount you spend to operate or produce it. Nevertheless, many companies still fail to create profit. This is because they haven’t efficiently executed any of the profit generators above. Profit generators are not one-size-fits-all. Where a profit generator benefits one company, it may have less effect on another.
The most significant step a company can take towards generating profit is a coherent business plan. It must outline the exact goals they wish to fulfill, aligned with the strategy to do so. This can be supported by competitor analysis which will ensure that the product/service offering is of value, and exploit a gap in the market. If it’s difficult to find this gap, then the business plan should be adjusted to allow a change of focus.
Finally, management should have an internal process in place to identify the types of employees they want to recruit. This will be with a view to creating a culture that reflects the values of the company. If these key factors are thoroughly executed, you can be assured a rise of profit will follow.