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

1. … ..increasing profits in a downturn…..

2. Reduce cost Increase revenue TWO WAYS

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

4. Reduce cost - 1 Fixed cost saved adds Straight to the profit margin 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, Rents Non sales Communication , interest on payables etc

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

6. Reduce cost - 2 Reduce unit variable costs thru outsourcing , offshoring, cheaper sourcing or improving efficiency Fixed cost saved adds Straight to the profit margin 5% reduction in unit variable costs leads to 2% increase in profit margin… everything else being the same

7. 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 adds Straight to the profit margin 5% reduction in sales leads to 2% decrease in profit margin… Whereas the total costs are the same as option 2 !

8. So in summary …..

9. Reduce cost ..savings from reducing fixed costs and variable costs … while maintaining the same level of sales …. add straight to the profit margin

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

11. Next..lets look at increasing revenues …..

12. Increase Revenue -1 Fixed cost saved adds Straight to the profit margin 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

13. Increase Revenue -2 Fixed cost saved adds Straight to the profit margin 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..

14. 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 “ ”

15. And the market for your products / services may in fact be reducing due to Market uncertainty and reduction in demand “ ”

16. Which could lead to you losing revenue even though You have increased your costs and efforts to increase sales !! “ ”

17. Decreasing Revenue ! Fixed cost saved adds Straight to the profit margin 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 option

18. So lets recap the options………..

20. 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!

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

23. Now lets go increase your profits…