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Finance Directors Turning SME's into Profit Leaders

How best to increase business?

There are several ways to improve your bottom line:

A: Increase sales prices
B: Buy smarter
C: Increase sales volume
D: Reduce costs

In this example see the effect when we focus changes of 5% on each area:

    Option A Option B Option C Option D
  Current  business Up Price Raise Volume Improve Buying Reduce costs
    5% 5% 5% 5%
Revenue 1,000 1,050 1,050 1,000 1,000
Costs of sales ( 600) ( 600) ( 630) ( 570) ( 600)
Gross Profit 400 450 420 430 400
Overheads ( 250) ( 250) ( 250) ( 250) ( 238)
Profit before tax 150 200 170 180 163
Profit increase   33% 13% 20% 8%

Option A   raised revenue goes straight onto the bottom line, though may need to pay sales bonuses.

Option B   Increased volume raises gross profit but with the same margin; it  may work but is likely to increase (variable) overheads and put stress on people and machinery, possibly needing more staff or investment..

Option C:   Better buying is not easy, negotiating with partners and suppliers or changing suppliers, which brings more management need over the risk to deliveries etc.

Option D:   Any reduction in costs may have repercussions on some staff and in this example has the least best pay off. 

Raising sales prices has nearly always been the best pay off for busy profitable companies.

Which will you change next?

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