This guide outlines the profit protection strategies every business — large or small — should have in place.
You can’t completely eliminate risk from the modern market economy, but that hasn’t prevented some businesses from trying. Companies are looking for ways to protect their profits and avoid the boom-bust cycle of old.
But what are they doing to achieve protection? Several things. The idea is to leverage numerous services and legal tricks to prevent circumstances from eating into margins.
Strategies for profit protection
The concept of profit protection sounds a little odd when you first come across it. After all, markets are inherently risky. However, it is essential for ensuring long-term success and avoiding annoying “tail risks” that most mathematical models don’t consider.
Insurance
The main method for profit protection is business insurance. Cover helps to prevent freak events from wiping out entire businesses that are otherwise functional.
Business insurance provider, Simply Business outlines why companies need to purchase adequate cover. “Not only is business insurance a legal requirement in many jurisdictions,” the insurer says, “but it is also something that protects against personal injury and professional indemnity.”
“Courts can force businesses to pay out millions to cover third-party losses, which can cause many uninsured firms to go out of business. Furthermore, if authorities discover the firm didn’t have the proper legally-required insurance, that can cause further legal problems.”
Fortunately, business insurance is inexpensive for most firms. Small monthly premiums protect companies against sudden, unexpected high costs that can sometimes send them under.
Risk Assessment And Management
Risk assessment and management is another productive profit protection approach firms are using to minimize their risks and support their margins. Companies are using various strategies to cope with the risks they face and reduce them where possible.
Methods for this approach are varied and interesting. For example, companies might want to reduce the cyber threats they face by training staff on common criminal tactics such as phishing.
Other risk-mitigation strategies could include being cautious about what they claim in their marketing and focusing on proper labor relations to avoid industrial action.
Legal Compliance
Firms are also making a substantial effort to improve their legal compliance in every aspect of their businesses. Companies are aware of the dangers of government audits and looking for ways to automate dealing with red tape.
Failing to stay compliant with rules can have a substantial impact on profitability. The EU’s crackdown on tech companies, for instance, is an excellent example of using regulatory apparatus to prevent outsized profits from dominating the industry.
Legal compliance is also essential for profit protection in smaller companies. Firms that fail to adhere to labor laws can find various sanctions imposed, including some that rule out profitability for years.
Intellectual Property Protection
Profit protection is also taking the form of intellectual property protection. Companies are trying to stop other firms from stealing their secrets and outcompeting them.
The primary method of intellectual property protection is patenting. However, this approach doesn’t always work. The main problem is the fact that firms can’t patent technologies already in the public domain. Instead, they must invest capital in R&D that might not necessarily produce results.
The other problem is the length of time obtaining a patent takes. Many firms wind up waiting for years for protection, by which time the market has moved on and their ideas are no longer relevant.
The other approach to intellectual property protection is trade secrets. Keeping knowledge about an idea, product or process internal to the firm prevents anyone from using it to compete.
This profit protection approach solves the problems with patents, but it can be challenging to defend. Leaks can occur, even if you put NDAs in place.
The most promising approach is to keep secrets to a few select members of the team you trust. This reduces the risk of information escaping but also limits your capacity to spread productive knowledge across your firm.
Employee Training And Retention
Employee training and retention are additional ways firms are using to protect their profits. When a worker leaves it is expensive to replace them. Companies have to pay recruiters high upfront costs that ultimately reduce their profitability and prevent them from competing successfully with other brands in their industry.
Employee training and retention measures help to prevent this issue. Evidence shows that colleagues begin viewing firms that implement these measures as their new homes, encouraging them to stay for longer.
Firms are paying particularly close attention to their star employees. These highly productive individuals are often essential for profit protection of margins at a given level.
Market Research
Firms are also doing more market research to determine potential threats coming down the pike. The profit protection focus in 2023 was on technological disruption. Firms worried new innovations would undermine existing business models, preventing them from functioning correctly.
This fear is not without reason. Kodak crashed and burned in the early 2000s with the advent of the digital camera the brand didn’t see coming. Also fell from grace in 2008 following the release of the first Apple iPhone, a significantly superior handset.
However, market research can also help firms anticipate shifting user tastes. Companies are looking into their proverbial crystal balls, trying to figure out how societal trends will translate into changing demand for goods and services.
Supply Chain Management
Supply chain management is another area deemed by many companies as essential for protecting profits and preventing unforeseen issues with logistics and inventory. For example, many brands are now implementing high-tech systems to prove the provenance of their goods as they move through the supply chain. Some are even using blockchain technology to create an immutable ledger, showing precisely where their products are.
Supply chain profit protection is also focusing on resiliency and preventing stock shortages or over-supplies requiring discounting. Companies are using AI and intelligent systems to anticipate demand weeks in advance.
Financial Monitoring
Finally, many firms are investing in financial monitoring solutions for profit protection. These tools help them avoid cash flow crunches and allow them to plan their spending more effectively, long-term, without running into shortages that prevent them from paying their bills.
Financial monitoring typically requires the help of an external bookkeeper. However, some firms choose to do it in-house.
Photo by Natasha Hall
