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Restoring Profitability

How do I restore profitability in my business?

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As a business owner, you’re probably looking forward to the end of a challenging period. You want to focus on maintaining and growing profitability, but you might not be sure where to start. In general, there are three strategies to improving profits: increasing efficiency, driving revenue growth and reducing costs. Here are some factors to consider for each.
In this article

Moving forward with your growth strategy 

Your business was resilient and weathered the pandemic, but it’s not smooth sailing yet. If you’re concerned about profitability, you’re not alone. A March 2021 report from Statistics Canada revealed that 41.8% of business owners expect a drop in profitability in the short term. Conversely, only 8.3% of businesses expected an increase. 

These statistics show that many Canadian business owners see challenges in the months ahead. If you want to return to profitability, and if you’re contemplating changing your business strategy, you might still face fluctuations in demand, under- or over-supply, cash flow and operational issues. These factors will shape both the form and the timing of your strategy. 

Regaining profitability in your business – three key approaches 

There are three core elements to attaining business profitability: operational efficiency, revenue growth and cost reduction.  Ideally, you will address all three to maximize your performance, but it is not always clear where to start. Every business is unique, and you’ll weigh each of those considerations differently depending on your situation.  

It’s possible that you know the answer immediately, though many times it is not so obvious. If you’re in doubt, the best way to figure out what to prioritize may be to conduct an assessment. 

1. How do I adapt my operations to increase efficiency? 

Most small business owners are constantly looking for ways to make their business more efficient. This was true before the pandemic and it certainly remains so as businesses navigate the next phases of recovery. You may have already taken some measures to boost efficiency, or you may have had your hands full keeping things going during the height of the crisis. Either way, this may be a good time to look for ways to further improve your productivity.  

One of the positives that came out of the past year was the increased pace of innovation. As a business owner, you now have access to many tools to help you run your business more efficiently. For example, it is easier than ever to use technology to find your best product mix, and to help with order taking, processing and delivery. Now may be a good time to look for tasks that you can streamline, outsource or automate.  

2. What are my options to drive revenue growth?  

It’s no secret that the pandemic has had a significant impact on the revenues of all organizations in the country, particularly small businesses. Statistics Canada reported that 86.4% of accommodation and food services business and 78.3% of art, entertainment and recreation businesses reported drops in revenue in 2020. This means that many small businesses in Canada are going to be playing catch-up over the next year.  

Some of the strategies recently deployed by small and medium businesses to boost revenue include new delivery and sales models, and e-commerce is especially popular: according to Statistics Canada, 16.7% of businesses had an online sales platform or had plans to implement one as of early 2021. Does this mean you need to build your own e-commerce platform? Not necessarily – you might not need to have your own sales platform, because working with a service provider could help you keep costs low.  

There are a multitude of other ways you can boost revenue. These can be as simple as offering coupons and loyalty programs, and bundling products/services. You could also add complimentary offerings, expand your geographic market area, form partnerships with other businesses or even alter your pricing model. Depending on your circumstances, one or more of these could be right for you.  

While boosting revenue, each of these solutions have related cash flow and tax implications. For example, cash flow might be reduced up front in the form of increased inventory and sales costs, or down the road for options like loyalty program redemptions or coupons. Expanding your sales outside your current province(s) or overseas could result in additional tax requirements. If these steps deliver the revenue boost you are looking for, they are “good challenges” to have, and speaking to your business or tax advisor can help insure you’re prepared. 

3. How can I reduce costs? 

Addressing costs is the third element in the profitability equation. Depending on your line of business, significant costs may include inventory, leasing of real estate and/or equipment, administration, labour and – particularly in the wake of the economic downturn – debt servicing.  

As a first principle, the steps you take to control these costs should align with your strategy for future growth. In other words, make sure the moves you make will support the business model you plan to have a year from now – which is not necessarily the same one you had a year ago. 

If you have substantial costs related to leased space, you may be able to reduce or reconfigure your physical footprint through more virtual work, digitizing files and taking advantage of cloud-based tools for routine functions. Adding an online sales and delivery component may also give you more flexibility with your physical footprint, while also lowering the cost per sale in some cases. 

Debt represents another big cost for many companies, particularly those forced to borrow just to keep the doors open in challenging business cycles. There is a natural inclination to reduce this burden as soon as possible by shifting any and all available funds into lowering that debt. Doing this alone however, without the support of a debt advisor, might lead to unintended consequences.  

If you are facing substantial costs related to borrowing, consider speaking to someone with deep professional experience in this area. A debt advisor can assist you in several ways, including helping with refinancing or renegotiating credit agreements where you may have options that you were not aware of, such as lower rates or term changes.  Additionally, it’s crucial to have an advisor in your corner who can prioritize goals in complex situations and help mediate between you and your lenders.

Upcoming webinar
June 22: What's next for your business?

Learn key considerations for restoring profitability, expanding or selling.

 

Have questions? Let us help.

Restoring profitability can be a complex balancing act—but you aren’t alone. We understand the issues that affect your business and will work with you to find the best way forward. Whether you're focusing on reducing costs, improving operational efficiency or driving revenue, our advisors are in your corner.

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