PROFIT

 

Every company needs to earn a profit to be successful. A positive bottom line on a company's income statement is an indicator that the business is doing well. That bottom line or net profit is essential for the company's continued growth and prosperity. In this article, we cover the importance of profit and how it compares to growth, the different types of profit and tips for increasing profit.

Profit is the remaining revenue, also known as income, after a company has accounted for all expenses. In small businesses, the profit usually goes directly to the company's owner or owners. Publicly listed corporations pay out profits to the stockholders in the form of dividends. A business owner can keep the money or reinvest it into the company to generate growth and consequently, more profit.

Profit is an essential outcome of running a business. Often, earning a profit is the company's primary goal. A positive bottom line shows that the company is healthy and performing well. Profit is capital that companies can use for a variety of purposes, like maintaining the workplace or equipment, replacing or upgrading vehicles or other high-cost items, or investing in new products, services or employees. With good profits, businesses can expect to continue flourishing.

Often, businesses are looking for ways to improve their net profit. Companies can take several approaches to increase their profits:

Increase revenue

Cut costs

Remove products

Reduce inventory

Increase revenue

Companies can increase their revenue and thus improve net profit in three ways:

• Raise selling prices: Increasing the price of products or services will increase total sales and eventually net profits.
• Sell more products: Enticing customers to purchase a higher number of goods or services will lead to a higher net profit.
• Find new customers: New customers will increase profits through higher overall sales.

Cut costs

Another method of increasing profits is cutting costs. Companies can target and minimize direct and indirect costs to reduce expenses:

• Direct costs: These costs are expenses related specifically to the development of the product or service. Direct cost examples include labour and raw materials.
• Indirect costs: Also called overhead, indirect costs include expenses related to running the business but not specifically to the product or service sold. Indirect costs include rent or lease for the business premises and utilities like water and electricity.

Remove products

Sometimes companies sell a large variety of products or services. For those businesses, a great method for increasing profits is removing products or services that do not sell well. Discontinuing poor sellers will decrease production and other related costs, eventually improving the bottom line.

Reduce inventory

Holding inventory can be costly. Depending on what the company sells, inventory storage may require a separate building and extra employees. Reducing the amount of stock that the company keeps on-site can reduce costs and improve net profits.

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