There are various factors in businesses that define their growth and sustainability. These factors drive profits for your business. These factors may be identified as business drivers.
Recognizing and watching the critical drivers of your business is crucial to boosting profitability.
How to Identify Critical Drivers of a Business
A wide range of business driving forces exists as internal and external factors that affect the performance of a small business.
To identify the key economic drivers in your business, focus on the factors that:
- Reveal the performance and growth of the business
- Can be measured or calculated
- It can be compared to a standard, such as a budget, last year’s figures, or an industry average
Economic Drivers in a Business
Small business owners always work hard to move forward and focus on bookkeeping and other business operations. But they accomplish their real success when they completely understand the crucial factors that drive profit in their business and then focus on those economic drivers.
The Four Basic Drivers of Profit
- Price
- Variable costs (depends on the production and sales. Increase with increase in production and sales)
- Fixed costs (also known as overhead. Such as the salary of employees and bills to be paid every month)
- Sales
Price is a critical factor that may significantly affect the profit margin with a slight pricing change. Price increases immediately increase the profit margin. Many entrepreneurs focus on sales. An increase in sales volume, however, increases the variable costs. An increase in variable costs will lead to lesser profit if prices are not increased.
Another factor is that a decrease in variable costs increases profit margin but will not raise the total revenue. Fixed costs have the least effect on profit.
Each critical economic driver in a business’s economics is unique, but each key driver depends on all the other drivers. One cannot be affected without influencing the performance of the other. These key drivers are an economic force behind business growth and profitability. Small business entrepreneurs/owners must interpret these drivers concerning each other to make their own decisions. Employees also need to understand the key drivers in a business as, in the long run, they think strategically and advance in their careers.
Maintaining a good gross profit margin is especially important. If gross profit margins are falling, then focus on other key drivers that can affect profit margin to a downfall. There can be several reasons for a decreased gross profit margin. These reasons can range from higher input costs, too many discounts being given, production not up to the mark, or prices of production materials being increased recently. Take corrective action after realizing the reason.
The Major Profit Mistakes of Businesspersons
- Entrepreneurs focus on increasing revenue through prospective customers and partially forget their existing customers.
- They do not promote their product and market the brand image, so they often miss the chances to increase prices while their competitors do.
- Marketing is an investment tool. They cut costs on marketing, and hence, they cut business investment virtually. Marketing attracts more customers.
- The increasing price of a product compared to another similar product with a lesser price can affect the market share of the product.
Conclusion
Price, variable costs, fixed costs, and sales are key driving factors in a business. A business should not focus on one driver or interpret the other economic drivers in a company. Strategic marketing of your product is equally and essentially essential and will help attract more customers, generate more sales, and increase net profits. It will also build a brand image of your product, and its price can be increased to increase the profit margin. Make decisions in strategic ways that will upsurge the business in the long run.
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