MANAGEMENT OF PROFITABILITY

In spite of being so many types of businesses present there, when it comes to management of profit, only the four established drivers help to improve the bottom line.These four renowned drivers are:
*Increasing sales volume
*Increasing price
*Improving margins/contribution
*Reducing fixed costs
They utilize the principles which are going to be covered in this article.

1. Increase sales volume~ One example of this is increasing share of the existing market through discounting or  marketing.Other ways are selling existing products to new markets, offering new products to existing customers and  selling new products to new markets.The latter can be a high-risk but high-return strategy.

2.  Increase prices~ A RS 1 increase in the ‘top line’ goes directly to the ‘bottom line’.Although increasing prices is  one of the most effective strategies to increase profits, it is also one of the most difficult and uncompetitive.One way  to do it is by differentiating i.e. by investing in quality.Another is to charge different prices to different customer  niches.

3. Improve margins/contribution~ This is a key focus for many businesses.One might reduce cost by renegotiating  prices with suppliers or sourcing lower cost components.Simply changing the product mix to higher-margin  products might achieve the desired effect.Sometimes it cn be done by increasing productivity to generate more  output from the same cost of inputs.

4. Reduce fixed costs~ Many businesses cut assumed ‘discretionary’ costs such as  travel, entertainment, research  and product development costs.Whilst these costs may help to improve short-term profit, they often have long-term  consequences that can have a disproportionate effect on long-term profitability.Other methods that help to reduce  long-term fixed cost include investing in efficient administration, more effective staff utilization, optimizing use of  power, negotiating cheaper leases/rents, and of course sourcing cheaper financing.

There is an obvious trade-off between some of these options.The most effective combination of techniques will depend upon the nature of the business.

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