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…..increasing profits in a downturn…..

Increasing Profits

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A few thoughts on increasing profits... cost reduction vs increasing revenue...

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Page 1: Increasing Profits

…..increasing profits in a downturn…..

Page 2: Increasing Profits

Reduce cost

Increase revenue

Page 3: Increasing Profits

Lets look at reducing costs using some simplistic cases……………

Page 4: Increasing Profits

Reduce cost - 1

Fixed cost saved addsStraight to the profitmargin

Initial Option 1Sales 100 100Cost 70 65

Fixed 30 25Unit Var Cost 0.4 0.4

Variable 40 40Taxes & Ins etc 10 10Profits 20 25Profit Margin 20% 25%

5% reduction in fixed costs leads to 5% increase in profit margin…everything else being the same

Save fixed costs thru cost cutting

measures on anything that

does not directly generate revenue.

Travel, RentsNon sales

Communication , interest on

payables etc

Page 5: Increasing Profits

but of course there is a limit to reducing fixed costs …..

Page 6: Increasing Profits

Reduce cost - 2

Reduce unit variable costs

thru outsourcing ,

offshoring, cheaper

sourcing or improving efficiency

Initial Option 2Sales 100 100Cost 70 68

Fixed 30 30Unit Var Cost 0.4 0.38

Variable 40 38Taxes & Ins etc 10 10Profits 20 22Profit Margin 20% 22%

Fixed cost saved addsStraight to the profitmargin

5% reduction in unit variable costs leads to 2% increase in profit margin…everything else being the same

Page 7: Increasing Profits

Reduce cost - 3

Reduce total variable cost by reducing sales

force, sales communication ,safety stocks or other costs that directly relate to

sales.

Fixed cost saved addsStraight to the profitmargin

5% reduction in sales leads to 2% decrease in profit margin…

Whereas the total costs are the same as option 2 !

Initial Option 3Sales 100 95Cost 70 68

Fixed 30 30Unit Var Cost 0.4 0.4

Variable 40 38Taxes & Ins etc 10 9.5Profits 20 17.5Profit Margin 20% 18%

Page 8: Increasing Profits

So in summary …..

Page 9: Increasing Profits

Reduce cost

Initial CostsSales 100 100Cost 70 63

Fixed 30 25Unit Var Cost 0.4 0.38

Variable 40 38Taxes & Ins etc 10 10Profits 20 27Profit Margin 20% 27%

..savings from reducing fixed costs and variable costs … while maintaining the

same level of sales…. add straight to the profit margin

Page 10: Increasing Profits

Of course you need to remember that any cost reduction, that can directly cause sales to go do down are untouchable …..

Page 11: Increasing Profits

Next..lets look at increasing revenues …..

Page 12: Increasing Profits

Increase Revenue -1

Fixed cost saved addsStraight to the profitmargin

5% increase in sales leads to 3% increase in profit margin…

assuming sales volumes remain the same !

Increase the Unit price …while

maintaining the volumes….

Usually a tall order especially in a downturn

Initial IncreaseSales 100 105

Qty 10 10Price 10 10.5

Cost 70 70Fixed 30 30

Unit Var Cost 0.4 0.4Variable 40 40

Taxes & Ins etc 10 10.5Profits 20 24.5Profit Margin 20% 23%

Page 13: Increasing Profits

Increase Revenue -2

Fixed cost saved addsStraight to the profitmargin

5% increase in sales leads to 1% increase in profit margin…

assuming fixed costs remain the same !

Increase the sales quantity …

while maintaining the

fixed costs..

Initial IncreaseSales 100 105

Qty 10 10.5Price 10 10

Cost 70 72Fixed 30 30

Unit Var Cost 0.4 0.4Variable 40 42

Taxes & Ins etc 10 10.5Profits 20 22.5Profit Margin 20% 21%

Page 14: Increasing Profits

Of course while increasing revenue in a downturn/ recession you need to

realize that others may be thinking of doing the same….

meaning you may have higher unit variable costs to increase your revenue

Page 15: Increasing Profits

And the market for your products / services may in fact be reducing due to

Market uncertainty and reduction in demand

Page 16: Increasing Profits

Which could lead to you losing revenue even though

You have increased your costsand efforts to increase sales !!

Page 17: Increasing Profits

Initial DecreaseSales 100 90Cost 70 74

Fixed 30 30Unit Var Cost 0.4 0.4

Variable 40 44Taxes & Ins etc 10 9Profits 20 7Profit Margin 20% 8%

Decreasing Revenue !

Fixed cost saved addsStraight to the profitmargin

Overall market size reduces- you

spend more to increase revenue…

others do the same…nothing

happens..or worse you lose business as someone else is

more hungry

Not

a

optio

n

Page 18: Increasing Profits

So lets recap the options………..

Page 19: Increasing Profits
Page 20: Increasing Profits

and if you have money stuck in inventories….

One very strong way is to focus on increasing inventory rotation… which is one way of increasing sales while reducing costs!

Page 21: Increasing Profits

Of course different businesses will have different focus areas ………..

Page 22: Increasing Profits
Page 23: Increasing Profits

Now lets go increase your profits…