When an oranigzation's profit margins aren’t at expected levels, various factors can be at play. Profit margins are commonly a measure of business efficiency, and if the numbers fall short of projections, the solution will generally involve reducing costs, increasing sales, or both. Businesses must also assess why profit margins are below expectations to make focused and effective corrections.
How do you troubleshoot your profit margins?
Gain Insights from Annual Trends
Start by reviewing your company income statements from the past three to five years to look for trends and patterns. For example, what drives profits each year? Are there seasonal surges or lulls that you didn't take into consideration?
Review Declines in Sales
Identify familiar elements of your firm’s sales declines across the months and years. For example, lower demand during off-seasons, increased competition, botched cash flow management, and poor execution of strategies are all possible reasons for sales declines—brainstorm solutions to reduce the impact if the same circumstances are still a factor.
Whether or not you hit your sales goals, you always have control over what your company spends. Areas with the potential for cuts and reductions include material costs and operating expenses. Where did you overspend? Are there ways to comparison shop or ask for discounts on your raw materials, rent, and shipping services? Managing your spending can make a big difference to your bottom line.
Think about price adjustments
Is pricing an issue? Consider adjusting your pricing to improve revenues. By lowering prices, you may increase buyer interest and encourage more sales. On the other side of the coin, you can raise prices, sacrifice volume, and make more money on each sale. While both strategies can be effective, it depends on your customers’ tolerance level and the type of business. Studying competitor pricing and surveying your recent customers can yield valuable insights on this issue.
Speak with a professional
If you’re still stumped about why your profit margins aren’t where you thought they would be, consider working with professional accounting services on your company’s behalf. An outsourced accounting company can view the situation objectively and see what you cannot see. Also, consider an outsourced bookkeeper as they can bring an alternative prespective at an more affordable rate than most CPAs.
Profits are the lifeblood of business, and if yours are lagging, it’s time to take action. Work with your controller, take the guesswork out of troubleshooting profit margin discrepancies and help get you back on track.