There are times in business when profits start to decline. This unfortunate event can occur due to several factors. The root of this problem can be determined, and if done so at the right time, it can be turned around.

Things are constantly changing, and we all know that nothing is ever guaranteed or stays the same, both in general or in the business world. There are several factors that can lead to an overall decrease in profits and sometimes even turn profits into losses.

The marketing and sales strategies that you had in place may have worked for a long time, but they might have now become outdated or irrelevant in today’s busy, technology-driven world. The world is moving at such a fast pace and keeping up to date with everything, along with implementing new, innovative changes, is important to help save profits from deteriorating.

If you want to avoid a decline in profits, the first thing to do is to look for factors that indicate it’s time for a change and adaptation. It is extremely risky to stay idle and do nothing about the decline in profits, as the business may eventually cease to exist as a result, if the problem is not solved.

Now, let’s have a look at the factors which may indicate or lead to a decline in profits and how to improve and build this back up…

Factors indicating a decline in profits

The Accounting Equation indicator

To calculate the operating profits, you must deduct the costs of goods. For instance, if a company sells goods worth £1,000 which costs £800 and the expenses are £50, then the total operating profit will be £150. The purpose of this accounting equation is to give you an insight whether a transaction taking place will have a positive or negative impact on your operating profit.

Increase in supplier costs

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 then charge you a higher price than before. These higher prices can negatively impact your profits.

Lower prices of goods

Sometimes businesses lower the prices of their goods to attract more customers and generate more sales. However, this doesn’t always go in their favour and can backfire by having a negative impact on their profits.

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.

Changes in industry

Industries that are fast-paced and highly depend on technology and innovation change regularly. The introduction of a new technology or product will highly impact your product sales as the previous versions will then become obsolete.

The above points are all the main reasons behind profits declining in a business.

Now let’s have a look at how to solve these reasons and get out of the slump…

How to improve – Find a solution

Implementing new business strategies

In a market were there is intense competition, profits can be impacted heavily. But there are ways to counter this by introducing a new business strategy or altering an old one.

Adjusting the product

Adjusting or improving a product can majorly increase profits.

Streamline purchasing

No customers want to go through a complex buying process when purchasing an item or service, especially if you sell online. Streamline this process by purchasing and walking trough the whole shopping experience.

Altering employee strategies

Poor management leads to unhappy employees who become frustrated over time. Consequently, they may not work at their true potential. Revisit the expectations of the company from the employee and make sure you provide them with incentives to work to the best of their ability.

Invest time in identifying the problem

It is always recommended to invest your time and effort when investigating the decline in profits. Once you get to the root of the problem, only then you can implement the correct and effective strategies.

Think carefully before cutting down on expenses

When deciding to simply cut down on expenses, you should remain very careful. Make sure you don’t cut down on those expenses that may lead to a negative impact on your productivity and/or disturb your employees.

Rethink your bookkeeping techniques

Modern accounting software can help to keep an eye on your profits as well as helping to reduce the amount of time spent when keeping on track of your bookkeeping. See our top 10 bookkeeping tips blog here.

To conclude, Your Tax Shop understands that operating a business is associated with constant risks and obstacles. However, the fear of risks shouldn’t discourage you from following your dreams as a lot can be done to counter the risks involved, with investing your time and effort to help improving certain processes and strategies.

You can prepare for the decline in profits in advance, by doing your research and keeping an eye on certain aspects of the business. The most common reason for a company to go out of business is a decline in profits. Your Tax Shop hope to have helped you to identify the main reasons by which the decline is caused. We have also discussed the above points that show how you can jump out of a profit declining slump effectively by implementing the right strategies at the right time.

Want some more information on this topic, or require our experience and knowledge to help boost your business profits? If you have any queries or would like to discuss your situation in further detail, then get in touch with our team today on 0161 339 5689 or book a no-obligation appointment – it really is that simple!