Profitability is a metric that can be used to measure your company’s earnings after all expenses are paid and help you evaluate financial performance. Improving your company’s profitability can seem daunting, but, as a manager, you’re in a position where each decision you make could impact your organization’s bottom line. Like any significant goal, achieving this is more manageable when broken into smaller action items.

Here are eight steps you can take to improve your organization’s profitability.

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How to Improve Profitability: 8 Steps for Managers

1. Learn to Read Financial Statements

The first step is to familiarize yourself with three key financial statements: the balance sheet, income statement, and cash flow statement. Here are several resources to get started:

Determine which pieces of these statements you can control as a manager. A baseline understanding of the balance sheet, income statement, and cash flow statement can give you a clearer picture of what your business is spending and earning, and lead to productive conversations with other decision-makers about budgeting and efficiencies.

2. Calculate the Profitability of Future Projects

One way to gauge the impact you can have on your company’s financial health is to calculate projects’ predicted profitability. There are three metrics to consider when doing so: net present value, internal rate of return, and payback period.

The net present value (NPV) is the amount of money a particular investment is worth to your organization today. This calculation takes both the time value of money—the concept that your money is worth more now than the same amount is in the future—and the inherent risk of investment into consideration. If a project’s NPV is a positive number, the project is expected to be profitable.

The internal rate of return (IRR) is the discount rate that sets the NPV equal to zero. In other words, when using the IRR, your project would neither be profitable nor losing money. Your project’s discount rate must be lower than its IRR to be profitable.

For instance, if you were to find that the IRR for a project is three percent, but the project’s discount rate is five percent, you can predict that the project will not be profitable and pivot accordingly.

The payback period is how long an investment will take to pay back the initial cost. It’s useful to know how quickly you expect to see a return on your investment when pitching projects and planning budgets.

Related: Financial Terminology: 20 Financial Terms to Know

3. Find Efficiencies in Your Processes

Analyze your company’s income statement and notice the expenses. Are there any items that can be eliminated by streamlining processes? Which line items do you have control over, and can any be reduced or eliminated? Conducting an audit of your expenses and pruning away process inefficiencies are necessary steps toward improving your company’s profitability.

4. Create Budgets and Stick to Them

Knowing how to create a budget is an essential skill for managers. Familiarize yourself with your firm’s budgeting timeline, procedures, and financial statements so you can create a budget that equips your team to complete projects that drive profitability and performance.

Track each action item your team completes so you can compare your actual spending against projected costs. This can allow you to learn from mistakes and make better financial decisions moving forward.

5. Conduct Market Research

Conducting market research can help you learn about your current and potential customers’ mindsets. Options for undergoing market research range from inexpensive (for example, a free online survey) to expensive (for instance, bringing in an outside vendor to conduct in-person focus groups). No matter which option you choose, having these insights can be invaluable.

Perhaps your potential customers would be willing to pay $100 more for your product if it had a certain feature, or maybe your current customers would be more likely to buy from you again if they received a discount the second time. These insights could improve your organization’s profitability, but you won’t know until you ask.

6. Offer Bundled Products

If your company offers a variety of products, it could be in your best interest to offer two or more together for a lower price than if they were each purchased separately.

"Bundling is pervasive in several markets, and it works in many cases," says Vineet Kumar, an assistant professor in the Marketing Unit at Harvard Business School, in Working Knowledge.

Kumar cautions, however, that if bundling is the only option, it could impact sales negatively.

“It’s crucial to allow that kind of flexibility to the consumer,” Kumar says.

Per his research, consider pitching the idea of offering a bundled option alongside your individual product offerings—a tactic called mixed bundling. Kumar and his co-author, Timothy Derdenger, found that a pure bundling solution, in which no individual products are available, caused a 20 percent reduction in sales, and that a mixed bundling solution yielded higher revenue increases than both pure bundling and individual product sales.

Related: How & Why Managers Use Financial Statements

7. Dedicate Time to Training New Hires

A recent survey found that 40 percent of employees who receive poor training leave their jobs within the first year. Considering the cost of replacing an employee can range from one-half to two times the employee’s salary, it’s in the best interest of your organization to train new hires thoroughly and effectively. Doing so can not only lead to a greater sense of self-efficacy and aid in employee retention, but also help mitigate costly mistakes down the line.

Related: How to Foster Employee Engagement When Your Team Is Remote

8. Foster Engagement in Your Employees

Research by Gallup shows the employee engagement rate in the US is at an all-time high: 38 percent. The downside is that 13 percent of workers report feeling actively disengaged, leaving 49 percent somewhere in between.

To engage your employees, consider a few of the strategies below.

  • Solicit feedback from your team and act on the results
  • Communicate transparently across teams and business levels
  • Provide constructive feedback based on observations
  • Recognize your employees for their work and opinions
  • Support your employees’ learning and development
  • Delegate tasks to your employees to demonstrate your trust in their abilities

If managers and human resource professionals work to better engage their “actively disengaged” and “in-between” employees, an increase in productivity and decrease in turnover rate could follow, which would positively impact profitability.

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Making an Impact as a Manager

As a manager, your actions and decisions have the potential to impact your company’s profitability. Once you’ve mastered how to analyze your company’s financial statements, you can begin making choices to help its bottom line and become a better manager.

Understanding which facets of your organization impact specific numbers on financial statements can enable you to decrease expenses, scale up revenue, and take full advantage of your company’s assets.

Are you interested in improving your management skills with finance? Explore our six-week online course Leading with Finance or our other finance and accounting courses and discover how you can gain the skills and confidence to use the fundamentals of finance in your career.

Catherine Cote

About the Author

Catherine Cote is a marketing coordinator at Harvard Business School Online. Prior to joining HBS Online, she worked at an early-stage SaaS startup where she found her passion for writing content, and at a digital consulting agency, where she specialized in SEO. Catherine holds a B.A. from Holy Cross, where she studied psychology, education, and Mandarin Chinese. When not at work, you can find her hiking, performing or watching theatre, or hunting for the best burger in Boston.