How can profits be raised?
Most businesses strive to increase their profits. The first difficulty to clear in being profitable is having a positive gross margin. Indeed, for the owners and managers of many companies, the first measure of their company’s success is the gross margin percentage on their most recent income statement. While gross margin is an outstanding measure of the overall effectiveness of a company’s manufacturing operations, it should be interpreted with caution because. Gross margin is nothing more than the excess of revenues over the costs to manufacture all of the products that were sold during the entire period. The most important thing to increase profits is to decrease the cost of sales or control the variable costs, which can be controlled. Keeping optimum levels of inventory and controlling overheads can lead to more profits.
Profits can further be raised through leverage, using operational and financial leverage. The degree to which a business uses fixed costs compared to variable costs in its operations is referred to as “operating leverage.” The bigger the use of operating leverage fixed costs, associated with fixed assets, the bigger the increase in profits as sales rise and the larger the increase in loss as sales fall. In Financial leverage the capital structure has more debt compared to equity this leads to an increase the shareholders’ return on their investment and often there are tax advantages associated with borrowing.
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