Methods of Improving Profit

A business should always be looking to improve the returns that it makes. This can both in:

• Absolute terms (i.e. increase the total profit), and
• Relative terms (i.e. the profit margin or return on capital)

Let’s look at each option in a little more detail to see what the challenges are:

(1) Increase the quantity sold (higher sales volume)

(2) Increase the selling price (higher price per unit sold)

(3) Reduce variable costs per unit

(4) Increase output

(5) Reduce fixed costs

As you can see, each of the above approaches has its advantages and disadvantages. A business will often try more than one of the above approaches at the same time in order to increase profit.

There are some other more complex approaches that can be taken. You don’t need to know these in detail, but here is a summary:

Reduce product range

• Business often has too many products = complex operations & inefficiency
• Some products may be very low-margin or even loss-making

Outsource non-essential functions

• A way of reducing fixed costs
• Focus the business on what it is good at
• Areas to outsource: e.g. IT, call handling, finance