Understand the Economic Drivers of your Business

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There are various factors in businesses that define its growth and sustainability. These factors drive profits for your business. These factors may be identified as business drivers.

Recognizing and watching the key drivers of your business is crucial to boosting up profitability.

How to Identify Key Drivers of a Business

A wide range of business driving forces exist 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 business
  • Can be measured or calculated
  • Can be compared to a standard, such as a budget or last year’s figures, or an industry average
  • Are in your control

Economic Drivers in a Business

Small business owners are always working 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

  1. Price
  2. Variable costs (depends on the production and sales. Increase with increase in production and/or sale)
  3. Fixed costs (also known as overhead. Such as salary of employees and bills to be paid every month.)
  4. Sales

Price is a key factor that, with a slight change in pricing, may affect the profit margin greatly. Increases in price immediately increase the profit margin. Many entrepreneurs focus on sales. Increase in sales volume, however, increases the variable costs. Increase in variable costs will lead to lesser profit if prices are not increased.

But, another factor is that decrease in variable costs increases profit margin but it will not raise the total revenue. Fixed costs have the least effect on profit.

Each key economic driver in a business’ economics is unique but each key driver is dependent on all of the other drivers. One cannot be affected without influencing the performance of the other. These key drivers are an economic force behind the business growth and profitability. Small business entrepreneurs/owners must interpret these drivers in relation to each other to make their 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 very important. If gross profit margins are falling, then focus on other key drivers that can affect profit margin to a downfall. There can be a number of reasons for a decreased gross profit margin. These reasons can range from input costs are more, too many discounts are being given, production is not up to the mark, or prices of production materials is increased recently. Take corrective action after the realization of the reason.

The Major Profit Mistakes of Businesspersons

  1. Entrepreneurs focus on increasing revenue through prospective customers and partially forget their existing customers.
  2. They do not promote their product and market the brand image so they often miss the chances to increase prices while their competitors do.
  3. Marketing is an investment tool. They cut costs on marketing and hence they cut investment in business virtually. Marketing attracts more customers.
  4. Increasing price of a product in comparison to another similar product with 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. It is highly undesirable for a business to focus on one driver and not interpret the other economic drivers in a business. Strategic marketing of your product is equally and essentially important and will help to attract more customers and generate more sales and increased 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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