One of the constants in business is the drive to increase company profits, although many other aspects are increasingly important in the modern business environment, increasing bottom line or profit underlies every decision made by large organisations or small companies alike.
During the early part of my career a manager imparted a simple guide which has always stayed with me and guided my understanding and focus within the business environment.
"There are only three ways to increase profit in a business"
1. Raise the sell price of the goods sold
This task may appear to be very simple solution, with an increased sell price there is greater profit made. It is however generally understood that a product has an optimum sell price at which a customer will purchase the product. Simply raising the cost of the product without increasing the perceived value to the customer will not increase profit but reduce the number of customers interested in purchasing the product and ultimately reduce profit. The retail industry takes this point very seriously and invest heavily in researching the optimum retail cost.
2. Sell more goods
Increasing sales offers greater bottom-line profit as the companies 'break-even' point is reached earlier in the yearly cycle. There are a few problems with increasing sales, driving greater sales takes great effort and finances whether through mass or targeted marketing; Increased sales rarely happen instantly and require persistent focus, market insight and long-term strategies to grow market share.
3. Lower Costs
Lowering the cost of the inputs to the business provides the safest and most effective way of increasing bottom line profit. Lowering the cost of the inputs can also drive sales by allowing for lower selling price while maintaining or increasing profit. Of the three option shown, lowering costs provides the fastest route to greater profit with small changes in cost realised quickly as purchases of inputs are made while having a cumulative effect on yearly profit.
In an efficient organisation all three point are managed together effectively maximising profits into the business while protecting and growing market share. Focusing on one point only will not provide stable results and may damage the long term health of a business. By maintaining a strong cost position while optimising sales through the business provide a strong and sustainable method of increasing profit year on year