Tax Talk: Driving Sales or Cutting Costs (download in PDF format)
January 30, 2012
There is a saying in the business world, "Revenue for vanity, profit for sanity", and never has this been more relevant than in today's economy. After years of excess, companies are now faced with lower revenues, high costs and decreasing profits.
With consumers increasingly focussed on finding the lowest possible price, many businesses are struggling to keep revenues up. All too often, in an effort to maintain or grow sales numbers, prices are cut, profit margins decrease and ultimately cash flow suffers. In many instances, companies would better to cut costs rather than prices. Consider the following 2 scenarios:
Scenario 1 |
Scenario 2 |
||
Sales |
$100,000 |
$105,000 |
$100,000 |
Costs |
$80,000 |
$84,000 |
$76,000 |
Profit |
$20,000 |
$21,000 |
$24,000 |
A business seeking to improve profitability has two options: increase revenue or decrease costs. For a company with annual sales of $100,000and costs of 80%, a 5% increase in sales to $105,000, with a corresponding increase in costs to $84,000 would result in an additional $1000.00 in profit. Should that company choose instead to decrease costs by 5%, dropping them to $76,000, the result would be a $4000.00 increase in profit. In this instance, taking no other circumstances into account, the decision to cut costs by 5% rather than attempting to increase sales by 5% results in a 75% greater increase in profit on a 5% change. Had the company chosen to cut prices in order to increase, thereby increasing their costs, this difference would be even more significant.
In a highly price conscious environment, attempts to increase sales can be very difficult, and often cost-cutting can be an effective and efficient way of increasing profits. Many of the companies that are struggling today were built during a booming economy, and as a result they may have paid little attention to costs along the way. If so, there may be an opportunity to do considerable cost-cutting without affecting the quality of the business.
Over the long term, increasing sales is important for sustaining & growing a business. However, investing time in cost reduction strategies can be a very profitable undertaking, and should in fact be something that businesses address on a regular basis. Certainly it is a practice that can be taken too far, and cannibalizing a business in order to show increased profits does far more harm than good. Trimming a little fat, however, is always a good practice.
To email Kevin, CLICK HERE
Certified General Accountant |
| |
| |
Copyright © 2005 - 2011 KM Cox & Company Inc. |
| |
 |