Managing Profits in Small Business

Managing Profits in Small Business.

A business is organised for the purpose of making profits and in the long run profits decide the success of a business. Analysing profits would have been an easy task if we had perfect knowledge about the future. However, while nothing in the world is certain, expectations are not always realised. Hence, profit planning and management becomes an important part of business, especially for the business owner.

Profit Margin

  • Profit margins are expressed as a percentage and, in effect, measure how much out of every dollar of sales a company actually keeps in earnings.
  • Profit margin is part of a category of profitability ratios calculated as net income divided by revenue, or net profits divided by sales.
  • When examining a business, pay close attention to profit margin.

  • Net income or net profit may be determined by subtracting all of a company’s expenses, including operating costs, material costs-including raw materials, and tax costs, from its total revenue.
  • Revenue minus cost divided by revenue times one hundred equals profit margin.
  • If you spend one dollar to get two dollars, it is called profit margin.
  • The higher the price and the lower the cost the higher the profit margin.
  • In any case your profit margin can never exceed one hundred percent, which only happens if you are able to sell something that cost you nothing.
  • The higher the margin the more money the business gets to keep from each sale.

Declining Margin

  • Regardless of all of the above, there are many market pressures that can lead to decline in margins over time.
  • Aggressive racing by competitors, new offers that decrease demand of older offers and rising input cost are some of them.
  • For individual firms within an industry, the external business environment also includes their competitors, who may introduce new, superior methods of production, change the ways in which they compete for business.

  • Sometimes, traditional sources of supplies of raw materials and components begin to look less reliable.
  • Most business try to keep their profit margin as high as possible, which is ok.
  • Businesses often use profit margin as a way of comparing offers.
  • If a company has more than one offer in the market, it tends to favour the offers in the market with the highest margins.
  • If a business needs to cut cost, it often starts by limiting offer of lowest margin.
  • The higher the margin, the stronger the business.

Value captured

  • Every business must capture some percentage of value it creates in the form of revenue, as profit.
  • If it doesn’t, the business will have difficult time in generating enough resources over time to continue operation.
  • Value capture is a process of retaining some percentage of the value provided in every transaction.
  • If you are able to offer another business something that wall allows to bring in one million dollars of additional revenue and you charge one hundred thousand dollars, you are capturing ten percent of the value created by the transaction.
  • In order to be successful you need to capture enough value to make your investments worth the time and energy, but not so much that there is no reason for your customers to do business with you.

  • People buy because they think that they are getting more value than what they are spending in a transaction.
  • The more value you capture the less attractive your offer becomes.
  • Capture too much and your prospects won’t bother purchasing from you.
  • Maximisation means that a business should attempt to capture as much value as possible.
  • Accordingly, the business should attempt to capture as much revenue in each transaction as possible.
  • Minimisation means the business should capture as little value as possible as long as the business remains self-sufficient.

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