Increasing Profits
-
Upload
vijaysharmaa -
Category
Business
-
view
5.787 -
download
0
description
Transcript of Increasing Profits
…..increasing profits in a downturn…..
Reduce cost
Increase revenue
Lets look at reducing costs using some simplistic cases……………
Reduce cost - 1
Fixed cost saved addsStraight to the profitmargin
Initial Option 1Sales 100 100Cost 70 65
Fixed 30 25Unit Var Cost 0.4 0.4
Variable 40 40Taxes & Ins etc 10 10Profits 20 25Profit Margin 20% 25%
5% reduction in fixed costs leads to 5% increase in profit margin…everything else being the same
Save fixed costs thru cost cutting
measures on anything that
does not directly generate revenue.
Travel, RentsNon sales
Communication , interest on
payables etc
but of course there is a limit to reducing fixed costs …..
Reduce cost - 2
Reduce unit variable costs
thru outsourcing ,
offshoring, cheaper
sourcing or improving efficiency
Initial Option 2Sales 100 100Cost 70 68
Fixed 30 30Unit Var Cost 0.4 0.38
Variable 40 38Taxes & Ins etc 10 10Profits 20 22Profit Margin 20% 22%
Fixed cost saved addsStraight to the profitmargin
5% reduction in unit variable costs leads to 2% increase in profit margin…everything else being the same
Reduce cost - 3
Reduce total variable cost by reducing sales
force, sales communication ,safety stocks or other costs that directly relate to
sales.
Fixed cost saved addsStraight to the profitmargin
5% reduction in sales leads to 2% decrease in profit margin…
Whereas the total costs are the same as option 2 !
Initial Option 3Sales 100 95Cost 70 68
Fixed 30 30Unit Var Cost 0.4 0.4
Variable 40 38Taxes & Ins etc 10 9.5Profits 20 17.5Profit Margin 20% 18%
So in summary …..
Reduce cost
Initial CostsSales 100 100Cost 70 63
Fixed 30 25Unit Var Cost 0.4 0.38
Variable 40 38Taxes & Ins etc 10 10Profits 20 27Profit Margin 20% 27%
..savings from reducing fixed costs and variable costs … while maintaining the
same level of sales…. add straight to the profit margin
Of course you need to remember that any cost reduction, that can directly cause sales to go do down are untouchable …..
Next..lets look at increasing revenues …..
Increase Revenue -1
Fixed cost saved addsStraight to the profitmargin
5% increase in sales leads to 3% increase in profit margin…
assuming sales volumes remain the same !
Increase the Unit price …while
maintaining the volumes….
Usually a tall order especially in a downturn
Initial IncreaseSales 100 105
Qty 10 10Price 10 10.5
Cost 70 70Fixed 30 30
Unit Var Cost 0.4 0.4Variable 40 40
Taxes & Ins etc 10 10.5Profits 20 24.5Profit Margin 20% 23%
Increase Revenue -2
Fixed cost saved addsStraight to the profitmargin
5% increase in sales leads to 1% increase in profit margin…
assuming fixed costs remain the same !
Increase the sales quantity …
while maintaining the
fixed costs..
Initial IncreaseSales 100 105
Qty 10 10.5Price 10 10
Cost 70 72Fixed 30 30
Unit Var Cost 0.4 0.4Variable 40 42
Taxes & Ins etc 10 10.5Profits 20 22.5Profit Margin 20% 21%
Of course while increasing revenue in a downturn/ recession you need to
realize that others may be thinking of doing the same….
meaning you may have higher unit variable costs to increase your revenue
“
”
And the market for your products / services may in fact be reducing due to
Market uncertainty and reduction in demand
“
”
Which could lead to you losing revenue even though
You have increased your costsand efforts to increase sales !!
“
”
Initial DecreaseSales 100 90Cost 70 74
Fixed 30 30Unit Var Cost 0.4 0.4
Variable 40 44Taxes & Ins etc 10 9Profits 20 7Profit Margin 20% 8%
Decreasing Revenue !
Fixed cost saved addsStraight to the profitmargin
Overall market size reduces- you
spend more to increase revenue…
others do the same…nothing
happens..or worse you lose business as someone else is
more hungry
Not
a
optio
n
So lets recap the options………..
and if you have money stuck in inventories….
One very strong way is to focus on increasing inventory rotation… which is one way of increasing sales while reducing costs!
Of course different businesses will have different focus areas ………..
Now lets go increase your profits…