Effective profitability management
In order to maximise profitability, management must put controls in place to minimise costs and maximise revenue.
Cost control
Fixed costs are costs that must be paid regardless of what happens in the business.
Variable costs are the costs that change proportionately with the level of production in a business.
Cost centres are particular areas, department or sections of a business to which costs can be directly attributed.
Revenue controls
To maximise profits, a business must establish policies that deal with sales objectives, sales mix and pricing.
Businesses should attempt to maximise sales by settings sale targets, and aiming for greater volumes and faster turnovers of stock. They must monitor the market and adapt to changes quickly. In terms of sales mix, control should be achieved through analysis of contribution to total profit made by each product, allowing decisions to be made on which products to focus on and which products to discontinue. Finally, a business’s pricing policy needs to be monitored. Lower prices increases sales volume but reduce profit margins. Businesses need to find the price that maximises sales ands still meets profitability objectives.
