There are instances in business when profits start to decline. This unfortunate event can occur due to several factors that come into play together or separately. The root of this problem can be figured, and if done so at the right time, it can be turned around. The most important thing to look at when profits start to go down is customer behaviour. Customer’s behaviours can change over time, and this can result in tumbling revenue if not adapted to.
We all know that nothing in general or in the business world stays the same. Things are constantly changing, and the owner is always at risk. This can happen to several things that can lead to the overall decrease in profits and sometimes even turning profits into losses. The marketing and sales strategies that you had in play may have worked for a long time, but they might be outdated or irrelevant in today’s time period. The world is moving at a fast pace and keeping in Line with everything it is essential to make changes almost all the time to save the profits from deteriorating.
If you want to avoid a decline in profits, the first thing to do is to look for factors that indicate that it’s time for a change and adaptation. It is dangerous to stay idle and do nothing about the factor as the business might cease to exist if the problem is not solved. So let’s first have a look at all the factors that indicate that profits might decline and how to counter them and the already declining profits.
Factors indicating a decline in profits:
The Accounting Equation indicator
To calculate the operating profits, you have to deduct the costs of the goods and the expenses from the sales costs of the goods. For instance, if a company sells goods worth £2000 which costs £1800 in total and expenses are £100, then the total operating profit will be £100 i.e., 2000-1800-100= 100. The operating profits originate from the core business transactions, which means that these transactions are not regular day-to-day transactions. Moreover, investments, taxes, and interests are not accounted for when calculating operational profits. The purpose of this accounting equation is to give you insights about whether a transaction taking place will have a positive or negative impact on your operating profit. So, a negative accounting equation while calculating operational profits will cause your profits to fall and can be fatal to the business. It is very important to keep a check on your accounting equation as it indicates whether profits will decline or not and you need to decide how many negative transactions your business can accommodate and what changes you need to make to avoid them.
Increased Supplier Costs
Another simple yet important factor that can lead to declining profits is selling goods at a higher cost. Now, this could happen due to several reasons, but the most common is the prices increased by the supplier. The suppliers can increase prices of materials over time due to their own motive of making more profits or sometimes their own costs shoot up. As a result, they charge you a higher price than before. These higher prices can negatively impact your profits. Consequently, you may have to look for alternative suppliers to counter this issue.
Lower Prices of Goods
Sometimes companies lower the prices of the goods to attract more customers and generate more sales. However, this doesn’t always go in their favour and can backfire by reducing profits. Sales might increase, but the cuts in prices may reduce the overall profits. So, it is better to focus on maintaining a brand image which helps increase profits by keeping prices stable in the long run.
Maintaining a set price is essential because if you lower the price for a long time, customers get used to it and won’t follow through when you increase the prices. However, when the prices go down in the industry, then you are bound to decrease prices, and that is where the profits will fall if you can’t cut down on your expenses and costs.
Additional Costs of Goods Sold
Alongside the rise in supplier prices, additional costs add to the higher costs of goods sold. For instance, if you take an environmental approach to the business by introducing an eco-friendly packaging, the additional cost of packaging can either be put on customers or born by the business itself. Consequently, the profits will decline in either case. Other additional costs include a rise in transportation costs.
Highly competitive market
Another factor that adds to the declination of profits is intense competition from rivals. The competition can increase due to strategies of already existing rivals or the addition of new rivals. In both cases, your profits can fall down drastically because of the more intense the competition, the harder it is to gain customers. Consequently, sales decline and as a result, your purchase of supplies decline. When this happens, you lose the liberty of enjoying the low costs of bulk buying from the supplier. The whole process leads to a decline in profits.
Changes in Industry
Industries that are fast-paced and highly depend on technology and innovation change regularly. The introduction of new technology or product will highly impact your product sales as it will become obsolete. As a result, the profits fall as your sales start to decline until you incorporate the new technology into your product or come up with something better.
These are all the major reasons behind the decline in profits of your business.
How to Improve
Now let’s have a look at how to counter these reasons and how to get out of the slump.
Implementing new business strategies
In a market where there is intense competition, profits can be impacted heavily, as mentioned before. But there are ways to counter this competition. You can disrupt the intense competition by bringing in a new business strategy or altering an old one. What you can do is change the focus of the business from one of cost to moving into niche markets. However, keep in mind that this strategy is most successful in large industries that have the potential to support segmentation and lesser supply competition. Moreover, you can also implement the differentiation strategy. In a marketplace with high competition, advertising the differences in your product and how it is better than the alternates is quite successful.
Adjusting the product
Adjusting the products can majorly increase profits. A bad product or service can create negative views in the audience’s eyes. These negative views can lead to a decline in sales and consequently, a decline in profits. So, you should look for problems in the inventory and observe which product has been lacking behind. Adjust them by dropping them or making them better. Moreover, on the technical side, keep an eye for software glitches, etc. if you feel like upgrading a product is financially challenging then consider keeping it on the side for a while or change the way you market it.
No customers want to go through a complex process of purchasing an item or service. Asking them to visit complicated websites and go through complex checkout procedures makes the whole process less enjoyable for them. Streamline purchasing by walking through the whole shopping experience. As a business owner, make sure that this procedure is not painful for the customers. By providing easy and safe purchasing, you can satisfy the customers, and as a result, the profits will increase.
Altering Employee Strategies
There are times when the downfall of a company starts from the top and falls down to the bottom. Poor management and integration of business results in declining profits. Poor management also leads to unhappy employees who become frustrated over time. Consequently, they will not work at their true potential and won’t treat the customers right. Make sure you have strict employee policies. When you hire someone, go through everything to ensure that they are the best fit for the job you have to offer. Revisit the expectations of the company from the employee with them and keep reminding them. Make sure you provide them with incentives to work harder.
Invest time in identifying the problem
Never rely on your first instinct when finding the cause of the problem as they are often wrong. It is always recommended to invest your time and effort when investigating the decline in profits. Once you the root of the problem, only then you can implement the correct and effective strategies.
Always start by reviewing the financial statements of the company and the account records. Compare the data over the years and figure out the intensity of the decline. You can also compare the current slump with previous ones, and that might tell you what has been going on.
Think carefully before cutting down on expenses
There are instances in a business where expenses cut downs become essential. However, when deciding to cut down expenses, one should remain very careful. Make sure you don’t cut down those expenses that negatively impact your productivity or disturb the employees. Cut down on expenses like changing the internet to a cheaper alternative that offers the same speed.
Look at all the positives and negatives of cutting down and expense and choose the most suitable options. For instance, if you have decided to cut down a support staff, it will be handy to think about the negative impact it will have on productivity.
Cautiously think about the effect of uncommon things, lags, and run rates.
Make certain to audit both year-over-year and month-by-month budgetary information. Any one-time costs or incomes (e.g., an unanticipated lawful cost, preventable stock decay, or sudden pay like Meaningful Use instalments) ought to be isolated out to decide hidden, institutionalized monetary execution. This will enable you to stay away from confusion about whether explicit things comprise unsafe patterns or are just planning contrasts or exceptional things improbable to repeat.
Suppose, for instance, that you’ve contracted a new physician during the year. Toward the part of the arrangement, you may find that her income misses the mark regarding desires. However, it may be wrong to reason that her creation isn’t on objective. A few sorts of slacks could influence her aggregate for that first year. Her efficiency for the last few months of the year will disclose to you progressively about the pace she’s working at (her “run rate”) than the entire year figures. The impact of credentialing, charging, and instalment slacks on physician income ought to likewise be considered. Investigate both charged sums and accumulations to get a clearer picture.
Rejig your bookkeeping techniques if fundamental.
Practices that have acquired workplaces or propelled new organizations some of the time overlay those substances into the current accounts. This unravels bookkeeping and accounting, however, makes it increasingly hard to recognize the main driver of issues at hand.
In case you’re uncertain whether individual business exercises are adding to benefit (or by how much), the (in fact repetitive) exercise of isolating out the financials can extraordinarily improve your examination. What’s more, in case you’re thinking about obtaining training or including another office or business line in 2019, plan in advance for the following costs and incomes in a manner that enables you to proficiently provide details regarding their benefit, not simply the exhibition of your business in total.
All the more, for the most part, paying little mind to practice structure, chiefs and bookkeepers frequently vary in their inclinations for following cost lines. On the off chance that your monetary reports show only a couple of general cost and income lines—each with numerous things folding up into the sums—think about progress to progressively granular bookkeeping. While this will mean progressively forthright accounting exertion, having the option to assess your numbers productively and successfully is significant—and can enable you to avert benefit issues before they start.
Realize that revenue is mostly the issue
Practices with unexplained or steep benefit issues may initially respond by cutting costs. Costs are frequently not the base of the issue, however—and concentrating on cuts may have restricted effect. Cutting costs can likewise aggravate benefit issues. For instance, staff decreases may legitimately influence clinician productivity, and less sent on promotion may mean fewer new patients. Moreover, cost slices frequently lead to fear and dissolve assurance, which can prompt turnover that can weaken monetary execution much more.
Doctors and practice administrators regularly go to cost cuts first since they belittle how much income can be improved. Repayments may, in fact, be crushed, yet there are numerous drivers of your income, you can impact altogether—and now and again effectively. Indeed, even little enhancements in income drivers like convenient charging and accumulations, records of sales, planning, and no-shows will satisfy over and over.
Income may likewise decrease due to things going on outside your entryways, for example, a dunk in the neighbourhood economy, cutbacks at a noteworthy manager, or a new challenge. Doctors and administrators who are centred around everyday difficulties may miss the greater picture effects on training execution. The effect of these externalities can be significant—at the same time, in addition to the side. They may display new income openings.
For instance, when enormous contenders enter a nearby showcase, autonomous practices might almost certainly contend adequately by offering progressively advantageous or customized administrations. At the point when new bosses or new wellbeing plans, please the scene, your training can stand apart by working adaptably with these associations and focusing on them for tweaked advertising endeavours.
The bottom Line
It can be concluded that operating a business is associated with constant risks. However, the fear of risks shouldn’t discourage you from following your dreams as a lot can be done to counter the risks involved. You can prepare for the decline in profits in advance by doing your research and keeping an eye on certain aspects of the business related to accounts, finance, and sales. The most common reason for a company to go out of business is a decline in profits. We have mentioned the major reasons by which the decline is caused and how to counter them. Moreover, there are several ways discussed above that show how you can jump out of a profit declining slump effectively by implementing the right strategies at the right time.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.