There are many suggestions that can be made when it comes to ways to increase profitability. However, despite all the formulae and all the suggestions, the ways to increase profitability comes down to two things. Either the business administrators must find a way to reduce expenses or increase revenue, or find a combination that will accomplish both.
For most businesses, whenever they find themselves in tough economic times, the first inclination is to cut expenses as a way to increase profitability. This is a natural inclination as it naturally seems there are some expenses that can always be cut. However, there are others that cannot be. In economics, these are known as fixed costs and variable costs. Variable costs are the ones that can be cut most easily.
There are a number of ways that variable costs can be cut. However, it should be pointed out that the highest of all variable costs for the vast majority of businesses is manpower. Therefore, for even moderately serious situations, a certain amount of layoffs, or at least reduced man hours, will likely be required to make a significant impact in reducing expenses.
While layoffs and reduced hours may be a popular way to cut expenses and, as a natural result, increase profitability, there is a certain risk to this strategy. First, others will have to find ways to compensate for this lack of help. While that adjustment takes place, it may be nearly impossible to increase profitability because productivity will suffer.
The more desirable, but also more difficult, option to increase profitability lies in increasing revenue while keeping expenses rising at a level slower than the increasing revenue. There are many ways to do this, depending on the type of business one has. Businesses that produce a product may add new product lines or increase prices. Service business can add services, charge premiums for some things, or increase prices.
As a case in point, the airline industry is a master at finding ways to increase profitability or, at least in some cases, at least decreasing the amount of loss. From charging for luggage, to charging for on-board refreshments, the industry has found ways to increase revenue by looking at potential streams that had never been tapped before. However, complicit in such actions are certain risks.
Customers often balk at higher prices and may decide to take their business elsewhere. The key for many businesses is finding an equilibrium between the prices customers are willing to pay and a price that allows the company to increase profitability. Of course, the law of supply and demand will usually ensure the market finds equilibrium. However, a substantial amount of financial hardship could ensue before that equilibrium is achieved.
