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What Are the Best Tips for Maximizing Profits?

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  • Written By: John Lister
  • Edited By: S. Pike
  • Last Modified Date: 29 September 2016
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Maximizing profits is something that is remarkably simple in concept but often difficult in practice. Flippant as it may seem, there are only two things that can be done to increase profits: increase revenue and cut costs. But a business owner dealing with day-to-day hassles may lose sight of these two principles.

There are four main ways to increase revenue as part of the goal of maximizing profits. The first is to increase the quantity of sales, for example by better marketing the product or improving quality. The second is to upsell to existing customers, for example by persuading them to buy enhanced services or accessories. The third is to diversify into selling a wider range of products. The fourth is to revise pricing to produce a more efficient balance of the number of sales and the revenue from each sale.

There are also several ways to cut costs. These include negotiating cheaper prices for supplies, particularly when buying in bulk. Costs can be cut by making the manufacturing process more efficient, for example by breaking it down into individual tasks and setting up a production line system. A business can also look at buying equipment it currently leases, or vice versa; assessing costs here may require taking a long-term view.

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One factor that makes maximizing profits confusing for some business owners is that many decisions have implications both for revenue and costs. For example, a company may be able to increase revenue by lowering sale prices and increasing the quantity sold. This may be counteracted by the fact that selling in higher quantities requires higher production costs. In turn, this can be counteracted by the fact that producing in higher quantities can lead to reduced costs per unit through economies of scale.

A business owner should also remember that maximizing profits involves all financial transactions, not merely those directly related to production and sales. For example, credit costs such as fees, interest and penalty payments can vary immensely. A company borrowing the same total amount may pay more or less for the borrowing depending on how many organizations it borrows from and how the debt is split. The company may also be able to increase its post-tax profits by making better use of allowable deductions.

Maximizing profits is not the only important goal of a business, particularly a small or recently created one. Cash flow is also vital. While profit figures measure the total amount of money coming into and out of the company, cash flow deals with when the money moves. Without keeping this in check, even a company whose line of business is fundamentally profitable may find itself unable to meet its obligations. This is a particular problem where a business finds it is required to pay for supplies and services upon delivery or even in advance, but is forced to allow customers a credit facility with payment coming later on.

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irontoenail
Post 3

@MrsPramm - Just be careful not to follow anyone's advice blindly. What worked twenty years ago might not work now. What worked in one city might not work in another. And sometimes people just plain don't know what they are doing.

As it says in the article, there are very simple ways to make more money and if you aren't sure what else to do, then concentrate on those.

MrsPramm
Post 2

@Mor - I don't think anyone intentionally cuts corners when it comes to their own business. Sometimes you simply don't have the ability to recognize what decisions should be made for the long term.

I think this is one reason why, for small or new businesses, it can be invaluable to have a mentor who has been around the block a few times. There are quite a few mentorship programs available in most major cities and with the internet it's not too hard to find one, even if you don't live close by.

A mentor can help you with profit maximizing, as well as with planning for the future so that your business will survive the long term.

Mor
Post 1

You have to make sure you look at the long term as well as the short term. Plenty of businesses will pull out all the stops and cut a lot of corners in order to maximize profits without considering whether these steps are going to ruin them down the road.

Even if you are going to try for profit maximization, you have to consider what is going to happen to that income. Putting it back into the business is the safest bet to ensure that you will continue to have profits in the long run.

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