Ensure profitability
Profitability is a prerequisite of your business activity. Build your company to make it profitable right from its establishment with accurate financial planning and correct pricing. Monitor regularly how your profitability develops and, if necessary, take corrective measures.
Do not be left alone with profitability issues but ask for expert assistance in time.
Your company can be considered profitable if it makes more money than it spends. That allows it to cover all its expenses through the revenue it makes from its activities. A profitable company can also develop its activities and distribute profits to the owners.
However, the revenues do not always tell the whole truth about profitability. Based on the revenues, your company may appear more profitable than it actually is, for example, if you do not take appropriate salary for yourself. Or, if you work longer hours than normal, your company's performance may improve, but its profitability in relation to the workload will not.
Your company's size and goals also have an impact on when the operations can be considered profitable: For sole traders, it is often enough that the business activities bring them a sufficient personal income. In larger companies, however, the shareholders usually have to earn a good return on their investments.
In addition, the sector your company operates in affects the profitability: the higher the risks in the sector, the higher profitability you should seek.
Profitability is the basic prerequisite for all business activities. If your business activities are not profitable, your company is not viable and, usually, will not survive for very long.
A profitable company makes money. The money earned allows you to cover the costs of your business operations, pay a salary to yourself and your employees, and distribute profits to the owners.
When your company is profitable, you can also boost, develop and grow your business. For example, you can acquire better equipment, invest in product development and develop your staff's competence. You can also expand your company's market, increase your product range, and create more jobs.
When your company is profitable, it generates confidence in outsiders. It facilitates access to external funding, for example, in connection with investments and internationalisation.
A profitable company is also easier and faster to sell. You usually get a better price on a profitable company than on an unprofitable one.
Prepare a business plan for your company. It helps you perceive and plan your operations and profitability in a comprehensive manner.
Prepare profitability calculations for your company. It indicates how much your company should sell at a particular price within a specific period to make its operations profitable.
Learn more about short-term and long-term financing planning. This way, you can support your company's profitability and make sure that you will have sufficient funds in both the near future and years later.
Prepare a budget for your company. You should prepare a budget on a regular basis, annually for example, throughout your business operations.
Price the products your company is offering correctly. Underpricing weakens your company's profitability, especially in the long run.
When planning your business activities and their profitability, make use of, for example, your accountant, your regional development company and the Enterprise Finland telephone service.
Actively monitor your company's financial situation. Preferably, overestimate the costs and underestimate the revenues. This helps you prepare for surprising situations.
Learn how to read the income statement and balance sheet. They will help you notice if your company's profitability is at risk of deteriorating.
Monitor the productivity of work. Keep a record of the time spent on each task. This will help you find out the tasks, customers and working methods that do not generate enough money in relation to the working hours used. Do not work for free.
Check regularly that the pricing of your company's products rests on a profitable foundation. Change the product prices and your pricing policy if necessary.
Keep billing up to date. Do not postpone the sending of invoices or allow too long payment periods. Make sure that the customers pay their bills on time.
Invest in finding profitable customers. In your sales, focus on products that provide the highest margin.
Dare to make reasonable investments. Do not get scared if the investment process momentarily lowers the profitability.
Regularly monitor your company's profitability with basic financial calculations. These include profit and loss account, balance sheet and cash flow statement. They provide a good overall picture of your company's finances, such as its profitability, assets and liquidity.
Regularly compare the actual financial figures with your budget. If there are clear differences in the figures, find out the reasons and take immediate action.
To monitor profitability, you can also use profit margin and return indicators. They indicate profitability based on your company's turnover and capital.
In addition to overall profitability, monitor product and customer profitability. By following them, you can identify the products and customers with low profitability. Dare to give them up and focus on the most profitable products and customers. You can also separately monitor the profitability of different projects and work phases.
Compare your company's financial figures with your competitors' figures. Find out what the potential differences derive from.
Start by cutting your company's expenses, by such means as:
- eliminate all unnecessary expenses
- find cheaper options for compulsory costs
- streamline work phases by eliminating any unnecessary steps
- eliminate any unprofitable products from your product range
- shop around for best suppliers
- concentrate your purchases for volume discounts
- outsource activities that are not part of your core business.
You can also enhance profitability by increasing your company's income, by such measures as:
- raise your product prices
- try to increase sales to your existing customers
- try to find new customers
- arrange discount sales
- expand your product range
- expand to new markets.
You may also be able to improve your company's profitability
- by doing sensible investments
- by using business subsidies
- by getting acquainted with tax issues under the guidance of your accountant.
The accountant is often the entrepreneur's most valuable support in financial matters. He or she will give you first-hand information on your company's financial matters, advice on improving profitability and advice on tax issues.
The development company in your region provides free financial advice. With their help you can get new ideas for improving your company's profitability.
The Centres for Economic Development, Transport and the Environment offer companies development services subject to a fee. They will help you understand the overall situation of your company and develop your operations with profitability in mind.
Business mentors provide free advice and support in different situations in your business activities.
From consulting companies, you can buy services to develop your company's business and improve its profitability.
Call the free Yrittäjän talousapu counselling service if the weakening of your company's profitability has led to financial and payment difficulties.
If it appears that your business is not profitable enough, you should consider closing it down.