When a company’s profit margins aren’t at expected levels, a variety of factors can be at play. Profit margins are generally 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 so that they can make focused and effective corrections.
Gather Insights from Annual Trends
Start by looking at business income statements from the past three to five years to look for trends and patterns. What drives profits each year? Are there seasonal surges or lulls that you didn't take into consideration?
Analyze Sales Declines
Identify common elements of your company’s sales declines across the months and years. Lower demand during certain seasons, increased competition, inept cash flow management and poor execution of sales strategies are all possible reasons for sales declines. Brainstorm solutions to reduce impact if the same circumstances are still a factor.
Whether or not you make sales, you always have some measure of control over what your company spends. Areas that have 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? Controlling spending can make a big difference for your bottom line.
Consider Pricing Adjustments
Was your pricing an issue? There are two strategies for adjusting it to increase revenues. One is to lower prices to increase buyer interest and encourage more sales. The other approach is to raise prices, sacrificing volume and operating costs but making more money on each sale. Both strategies can be effective, but it depends upon the type of business and your customers’ tolerance level. Studying competitor pricing and surveying your recent customers can yield valuable insights on this issue.
Consult a Professional
If you’re still baffled about why your profit margins aren’t where you thought they would be, consider enlisting professional accounting services on your company’s behalf. An outsourced accounting firm can bring an objective view to the situation and see what you’re not able to see. Consider also hiring a bookkeeper; outsourced bookkeeping services can bring a fresh perspective on an ongoing basis at a more affordable rate than most CPAs. Profits are the lifeblood of business, and if yours are flagging, it’s time to take action. Outsourced bookkeeping and accounting services can take the guesswork out of troubleshooting profit margin discrepancies and help get you back on track.