Profit and loss accounts - EduqasHow to improve a business’ profits or reduce costs
It is important to understand the difference between gross and net profit. Knowing the gross profit margin, net profit margin and average rate of return is essential when making business decisions.
How to improve a business’ profits or reduce its costs
Changing prices
One way a business can improve its profits is to try and make more revenueThe income earned by a business over a period of time from selling its goods or services.. They can do this by increasing their selling price: if they can maintain the same level of demand after this they will make more profit.
This is more likely if they don’t have many competitors.
In some cases, reducing prices could lead to an increase in demand that is big enough to increase profits overall.
For example, if a business is selling 10,000 products at £10 each, their revenue is £100,000. If they reduce prices to £9 and demand increases to 12,000 units, their revenue will be £108,000.
Reducing costs
Another way to increase profits is to reduce costs. This could include:
Reducing the cost of raw materials – this would reduce the cost of sales but could have an impact on the quality of the product.
Reducing labour costs – some businesses have introduced technology to reduce their wage costs. An example of this is self-service tills in supermarkets and online check-in for flights. However, the initial set up of technology can be costly and it could be unpopular with customers.
Reducing expenses – this could reduce costs such as insurance costs or finding lower interest rates without impacting the quality of the product or service.
