How to Improve Profit Margin

Even in today's tough economy, there are ways to improve the profit margin of your business. You need to look back at some fundamental principals that were used to build many successful businesses. These concepts are very simple, yet can effectively help achieve a higher rate of growth and profit in your company.

Instructions

1. Follow the Pareto 80/20 Rule. In the early 1900s, the Italian economist and sociologist Vilfredo Pareto created a mathematical formula known as the Pareto Rule. Basically, it states 80 percent of your customers or clients take 20 percent of your time. The key to improving income is to minimize the 20 percent of customers who are using up 80 percent of your time. Track your earnings vs. time spent. You must also account for non-billed hours, such as work spent on sales, research or work with performance incentive pay.

2. Collect payments on time. Make sure the customers you work for have the ability to pay on time. The old saying, "Time is money" is really true. If you are wasting your time trying to get payment owed, it is a waste of your business's resources and your time. Your time is much better spent working on new projects and finding new opportunities to increase profits.

3. Remember the rule of supply and demand. Everything with cost is affected by this rule. If the supply of your service or product is available from an ever-increasing number of businesses and the demand is stagnant, you can expect the price to start falling. Look for new opportunities to offer supply where very little businesses offer the product or service and demand is increasing. The result will be more work than you can take on and you will have the ability to increase prices.

4. Add value. Offering new products and services may add value to your customers. If McDonald's only offered hamburgers, do you think it would be the success it is today? It is much easier for a customer to drive through and pick up a complete value meal than to get out of their car at three different locations for the hamburger, fries and Coke. The same principal applies to most customers. If they can do one-stop shopping, it makes their life or business run more efficiently, as well. In the process you will pick up more business.

Tips & Warnings

• Set growth goals quarterly. Measure your achievement so you can make adjustments if needed. Create a business plan using some of these principles.

References

• How to Write a Great Business Plan for Your Small Business in 60 Minutes or Less; Sharon Fullen and Dianna Podmoroff
• Growing a Business; Paul Hawken