Maximizing profits is something that is remarkably simple in concept but often difficult in practice. Flippant as it may seem, there are only two things that can be done to increase profits: increase revenue and cut costs. But a business owner dealing with day-to-day hassles may lose sight of these two principles.
There are four main ways to increase revenue as part of the goal of maximizing profits. The first is to increase the quantity of sales, for example by better marketing the product or improving quality. The second is to upsell to existing customers, for example by persuading them to buy enhanced services or accessories. The third is to diversify into selling a wider range of products. The fourth is to revise pricing to produce a more efficient balance of the number of sales and the revenue from each sale.
There are also several ways to cut costs. These include negotiating cheaper prices for supplies, particularly when buying in bulk. Costs can be cut by making the manufacturing process more efficient, for example by breaking it down into individual tasks and setting up a production line system. A business can also look at buying equipment it currently leases, or vice versa; assessing costs here may require taking a long-term view.
One factor that makes maximizing profits confusing for some business owners is that many decisions have implications both for revenue and costs. For example, a company may be able to increase revenue by lowering sale prices and increasing the quantity sold. This may be counteracted by the fact that selling in higher quantities requires higher production costs. In turn, this can be counteracted by the fact that producing in higher quantities can lead to reduced costs per unit through economies of scale.
A business owner should also remember that maximizing profits involves all financial transactions, not merely those directly related to production and sales. For example, credit costs such as fees, interest and penalty payments can vary immensely. A company borrowing the same total amount may pay more or less for the borrowing depending on how many organizations it borrows from and how the debt is split. The company may also be able to increase its post-tax profits by making better use of allowable deductions.
Maximizing profits is not the only important goal of a business, particularly a small or recently created one. Cash flow is also vital. While profit figures measure the total amount of money coming into and out of the company, cash flow deals with when the money moves. Without keeping this in check, even a company whose line of business is fundamentally profitable may find itself unable to meet its obligations. This is a particular problem where a business finds it is required to pay for supplies and services upon delivery or even in advance, but is forced to allow customers a credit facility with payment coming later on.
