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Best 2 Ways to Improve Profits : Increase Revenue or Reduce Costs?

If a company wants to improve profits and continue to grow, it must increase revenue and reduce costs . It takes both sides working together to create a strong company.

Cost-cutting results come faster, but if the results don’t enhance the company’s strength and sales capabilities, what’s the point? Likewise, if the increased sales are offset by the costs it incurs, nothing is gained. If a company can both control costs and increase sales, it must be a long-lasting and successful enterprise.

Most corporate leaders want to increase profits, and so do their investors. This has always been at the forefront of almost every company’s strategy, and when a company is in decline or stagnant, improving profits must be a company’s main focus. There are two basic ways to increase business profits: increase revenue or reduce expenses. Strategies based on both may have unintended consequences. Because, in the complex world of business, change can make things move faster or make them worse. This is the moment that tests the decision-making skills of the management team!
How to Increase revenue ?
There are two ways to increase sales revenue: increase prices or increase sales. Raising prices may seem like a quick way to boost profits, but there are trade-offs. Because high prices will deter customers from purchasing, it’s a simple matter of cost and demand. Instead, you can increase sales by increasing marketing through innovation, a well-trained sales team, new locations, promotions, and more.
Remember, every time an item is sold, there is a cost associated with it, which reduces your profits. How would you choose? Henry Ford had a great solution to this problem. In 1909, his Model T sold for $220, nearly $6,000 by today’s standards. Ford wanted to increase sales by doing something revolutionary: lowering the selling price. He presented his idea to the board of directors, who did not agree and tried to oust him, even suing him for control of the company. But in the end Ford prevailed. Ford and his team analyzed the Model T manufacturing process and broke it down, putting each worker in charge of one of the links.
With these new production line methods, the Model T’s manufacturing time was reduced from 12.5 hours to 93 hours by 1914. Minutes, the price of the car dropped to $99. Profit margins per car did not increase, but sales increased rapidly, with profits rising from $3 million in 1909 to $25 million in 1914. Looking at photos of New York City from 1900 to 1913, the evolution from horse-drawn carriages to automobiles demonstrates his success

How to reduce costs?

Search some of the world’s most successful companies and you’ll find executives touting their cost-cutting plans. Why? Because reducing expenses of any kind increases profits (this can be seen visually on our Color Financial Dashboard). Business costs come from many sources, so there are many things that can be cut, however, you need to be careful. For example, if you cut employee benefits, you may lose valuable employees and incur greater costs to hire new employees and train them.

Many companies struggling in the recession have boosted profits by cutting jobs. But the challenge with this strategy is that as demand increases, you may not have enough of the right employees to meet your customers’ needs. For example, Circuit City’s performance continued to decline in 2007, and its new CEO wanted to increase profits again by firing salespeople who were earning more than their “fixed salary”—which meant immediately firing 3,400 performers. The best employees, the Washington Post reported on the layoffs of Circuit City employees that year.

This was a very unwise decision, and Circuit City quickly realized that it was laying off its most diligent, knowledgeable, and helpful employees. If getting a bonus raise results in a pink slip, why should the remaining employees work hard? Over the next eight months, Circuit City’s share price fell a staggering 70%, and in November 2008, the company declared bankruptcy. While the cuts made numerical sense in theory, Circuit City didn’t realize the cost of demoralizing its employees would ultimately put it out of business. (Of course, Circuit City re-launched the Circuit City brand in 2018 and announced it would operate as a chain store.)

conclusion

In conclusion, the pursuit of increased profits and sustainable growth in the corporate world demands a delicate balancing act between revenue enhancement and cost control. It is a dynamic interplay that defines the trajectory of a company’s success. While cost-cutting measures can yield swift results, they must be executed judiciously to ensure they do not undermine the company’s core strength or its ability to meet customer demands. Likewise, the pursuit of increased revenue should be driven by innovation, effective marketing, and strategies that resonate with customers rather than simply raising prices.

FAQs

  1. Why is it important to improve profits for a business?

Improving profits is essential for a business’s sustainability and growth. It allows for reinvestment in the company, debt reduction, and the ability to weather economic downturns.

2. What are some examples of increasing revenue to improve profits?

  • Increasing revenue can involve strategies like raising prices, expanding product lines, entering new markets, improving marketing efforts, or enhancing customer retention.

3. How can a business effectively reduce costs?

  • Businesses can reduce costs by optimizing processes, renegotiating supplier contracts, implementing energy-efficient practices, automating tasks, and evaluating their workforce structure.

4. Is it better to focus on increasing revenue or reducing costs?

  • The choice between increasing revenue or reducing costs depends on the specific circumstances of a business. Some situations may call for a focus on revenue growth, while in others, cost-cutting may be more appropriate. Often, a balanced approach is ideal.

5. Are there risks associated with increasing revenue?

  • Yes, there are risks. Increasing revenue too rapidly or without proper planning can lead to overextension, decreased quality, or customer dissatisfaction. It’s important to ensure that revenue growth is sustainable.

6. What are the potential drawbacks of cost reduction efforts?

  • Cost reduction efforts may lead to employee layoffs, reduced quality, or negative impacts on customer service if not carefully managed. Additionally, excessive cost-cutting can hinder innovation.

 

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