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1/9/09

How to Improve Your Net Profit

Improving your business's profits is not an easy task. It would be a lie to state that there exists a "quick fix" that will make your company profitable or will increase your company's profits overnight. However, some traditional ideas of how to increase your company's profitability still hold true. In essence, there are only two ways to make your company more profitable: (1) increase your revenue while creating a justifiable increase in your costs; or (2) decreasing your costs.

By far, the easier of the two options to implement is to decrease your costs. Decreasing your costs can be as simple as laying off workers, discontinuing a product or a particular product line, reducing your advertising efforts, and/or any and all of these options. However, even though these options will reduce your costs, you have to be aware that other problems arise when you implement any of these cost cutting measures. A lay-off of workers, for example, can lead to a negative community image of your company. Additionally, should you need to rehire skilled workers in the future, such workers may be hard to find or such workers may be apprehensive about working for your company.

Additionally, discontinuing a product or a particular product line and decreasing your advertising efforts may cause reduced revenue. Granted, the cost savings may more than make up for the decreased revenue, but the fact that revenue will be reduced still needs to be taken into account when determining the financial strength of your company.

As is shown above, reducing costs is easier to do because it does not require customer support to implement. You can unilaterally reduce your workforce, product line, and your advertising budget without customers' help. Raising revenue, however, is a different story. Raising your revenue generally means that you need to increase your sales. As such, customer support is needed.

The key is not simply to raise revenue. Raising revenues in and of itself is not a difficult task. The key is to raise revenues will keeping costs the same or by keeping costs at a justifiable level. In other words, it is easy to spend $1 million to increase a business's revenue by $100,000, but obviously, this is not a sustainable business model. If, however, you increase your costs by $100,000 and by doing so increase your revenue by $1 million, then that increased $100,000 cost is justifiably because your company is more profitable.

There is no "cookie-cutter" answer on how to increase a business's revenue while keeping any increased cost justifiable. Every business has a unique situation and thus, needs to be analyzed by its particular situation. However, once a proper analysis is completed, you will be able to implement revenue raising measures that can increase your company's profitability.

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