Financial Strategy to Improve Profit

Profit is the most important for a business to survive because with it, there is no reason for setting up a business. But likewise, profit alone with out determining how big or how small cannot be a measure of financial performance.  For example, a net profit of Php 200,000  is not good if your investment is Php 5 million. The return of investment (ROI) will only be 4%. But if the investment is Php 1 million for a net profit of 200k, then that is remarkable with a ROI of 20%.

So with those facts you need a strategy to help you achieve the highest possible ROI.  There are three indicators for determining the ROI and those are: Profit Margin, Productivity and Financial Leverage. Multiplying those three indicators and multiplying it again by 100 you will get the percentage of ROI.

Profit Margin

This is simply dividing your net profit by your net sales. For example a net profit of Php 100k  divided by a net sale of Php 300k multiplied by 100 will yield a  profit margin of 33%. Net profit and net sale have a big factor on your profit margin. If your overhead expenses increased, then there will be reduction in your net profit. Thus your profit margin will reduce. Increasing your sales or price will improve the profit margin if your can’t help the increase in overhead expenses.

Productivity can be measured by dividing your net sales to your total assets. For example you have a net sales of Php100k and have a total asset of 2 million multiplied by 100, then you will have 5%. It means you have 5 centavos worth of sales for every peso invested in assets. The higher the ratio the better because it means that the company used it’s resources well to generate sales.

Financial Leverage

This is computed by dividing the total asset by net equity. Net equity is sometimes called net worth or the amount of money you have actually invested in the business. For example you have a total asset of 2 million and the equity is Php400k, this yield a leverage ratio of 5.0 so it means that for every peso you invested in your business, you have 5 pesos worth of assets.

So to achieve your desired ROI, it is possible by improving any of the said three indicators.