Profitability | Home Wealth Project

The Profitability of American Corporations

Jan 17th

Posted by Home Wealth Project in Business Trends

These days everyone (myself included) has been talking about what happened to American business during the Great Recession and the tepid recovery that has followed. But what did the performance of American business look like in the years before the Great Recession? Were profits growing or shrinking? And what was the source of that growth or decline in income?

The IRS Statistics of Income provides some interesting data to show what has happened to the profitability of American corporations between 1999 and 2007 (right before the recession hit). Despite including the mild recession of 2001 and the dot com bust, these years were good ones for corporate America. The net income of the average American corporation increased by more than one third (34.1 percent) in real terms, reaching $252,396 (in 1999 dollars).

That sizeable increase begs the question: Why? The data suggest that one reason was by keeping costs in check. The average American corporation’s revenues increased only slightly in real terms between 1999 and 2007, but costs increased even less. As a result, the IRS data show that profit margins improved over the eight year period, with net income as a percentage of revenues at the average firm increasing from 5.7 percent to 7.6 percent between 1999 and 2007.

American companies were also worth significantly more in 2007 than they were in 1999. The net worth of the average American corporation increased 27.2 percent in real terms from 1999 to 2007.

Moreover, the net worth of American businesses increased relative to their sales. The net worth of the average corporation increased from 81 percent of one year’s revenues to 100 percent of one year revenues.

Of course, profitability and net worth didn’t increase in every industry. For example, the net income at the average utility shrank from $5,539,064 in 1999 to $4,573,696 in 2007 when measured in real terms.

The table below shows the net income per firm in 1999 dollars in both 1999 and 2007, as well as the percentage change between the two years for the 18 major sectors of the economy. Some of the numbers are a bit surprising, such as those for the average construction businesses, which made 1.7 percent less in real terms in 2007 than it did in 1999, despite the housing boom.

Click to see larger version of above chart

In addition, the negative news about U.S. manufacturing not withstanding, net income at the average manufacturing business increased by nearly two-thirds in real terms between 1999 and 2007.

In short, in many industries, American corporations increased their net income substantially between 1999 and 2007, in part because they got better at holding costs in check. Maybe that pattern holds clues for how American business will behave during the current economic recovery. Rather than expanding hiring and building new operations, the average corporation may try to rebuild its profits by minimizing costs.

From Small Business Trends

The Profitability of American Corporations

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Make This Your Most Profitable Year Ever – Profitability Tips

Mar 9th

Posted by Home Wealth Project in Business Trends

1 comment

Make This Your Most Profitable Year Ever If you’re like a lot of small business owners I’ve talked to since we rang in 2010, you probably sympathize with this statement: “Enough with the doom and gloom already. I don’t want to know how awful the economy is, I want to know how to make a profit anyway!”

A couple of weeks ago, our very own Anita Campbell tackled that issue with an Intuit Community webinar titled, “Make 2010 Your Most Profitable Year Ever.” Joining her for the webinar was expert Andy Birol of Birol Growth Consulting.

In spite of a few technical difficulties early on, it was another of Anita’s information-packed sessions with a mountain of actionable take-aways for small business owners, sponsored by Intuit.

Anita started the webinar with a couple of poll questions, which elicited the information that a surprisingly high 71% of participants didn’t know what their customer acquisition costs are. From the second question, we learned that most business owners either know who their most profitable customers are (50%) or they have a general sense but aren’t 100% sure (43%).

Birol used the poll results to launch into a discussion of how to analyze your customers in order to maximize profits.

TIP: If your most profitable customers are increasing their purchases, keep them happy and find more like them by asking for referrals. If their sales are low/flat, enhance your products and services to generate more sales from them.

TIP: If your low profit customers are increasing their purchases from you, reprice your products or services to more accurately reflect the costs of serving them or selling to them. If sales to these customers are low or flat, reduce or rethink your costs for serving or selling to them and how those costs can be reduced so that these folks become more profitable.

TIP: Fire customers that earn no profit (break even) or cost you money.

Profitable growth does not necessarily come from expanding your customer base. Instead, growing profitably — that is, making a profit while your business grows — comes from selling more to the customers you already have.

The underlying theme in all this, which might better have been introduced first, is that it costs less to sell more to existing customers than it does to sell more by acquiring new customers.

Your current customers already know and trust you. That gives you the chance to establish your expertise and experience, which will differentiate you from your competitors.

TIP: Differentiation gives you a stronger brand and more pricing power, so work to establish that expertise and experience in the minds of the marketplace.

On the subject of pricing, which often gives small business owners the willies, here is a terrifically quotable quote from Andy:

“Price, for me, is the single most important demonstration of self-confidence that a business owner can have.”

And finally, profitable growth comes from being willing to take what you make or do and re-package it for new sales or distribution channels.

In short, the general way to grow your business profitably (even during this recession) is to focus on your existing customers, sell your expertise and the wonderful experience of working with you, beyond just your product or service; and packaging your offerings for sale in multiple channels.

And, just for fun, there was a list of 45 ways you can improve your profitability in 2010:

Increase Prices

Raise prices
Eliminate discounts (or lower discount %)
Services: define scope and fight scope creep*
Push higher priced products, weed out low profit products
Use marketing to convey your differentiation and value

Increase sales and customer retention

Improve customer retention through better customer services, better communications, increased value-add
Cross-sell additional products or services
Upsell to higher priced, higher value products
Serve your most profitable customers well
leverage additional sales and distribution channels
Add self-paying sales like commissioned sales reps, PPC ads, affiliate program

Invoice!

Invoice promptly
Make sure invoices are complete and accurate
Use technology and automation to tighten invoicing and collection processes

Improve productivity

Reduce waste through controls
Train employees
Automate routine tasks
Upgrade inefficient equipment and software
Supplement tracking systems and analytics (a.la. Google) and “manage to your metrics”
Ask employees for cost-saving suggestions.

Reduce fixed costs

Find smaller offices; sublet; move
Employ part-time staff in place of full-time
Subcontract to independent contractors
Do preventative maintenance
Reduce staff if necessary
Change sales compensation to more commission, less guaranteed base

Reduce variable costs

Negotiate better deals with suppliers
Find less expensive suppliers
Take advantage of advance purchase discounts
Find cheaper materials and supplies (assuming quality is still there)
Hold online meetings instead of traveling
Create self-serve resources for customer service
If it’s not essential, eliminate

Manage capital wisely

Keep your books up to date, and review P&L versus budget forecasts regularly
Know your key indicators: DSO; customer acquisition cost; gross profit margin
Offer advance payment discounts
Put slow payers on “watch list”
Collect past due invoices quickly and personally
Don’t overinvest in inventory
Insist on shopping for alternatives
Negotiate for as much time as possible to pay your creditors (e.g., 30 – 45 day terms)
Make loan and credit card payments on time, to avoid extra interest and penalties

Be tax smart

Keep good up-to-date records to take advantage of all deductions
Actively engage in tax planning
Follow your tax calendar scrupulously to avoid unnecessary penalties, interest, and attorney and tax advisor fees