3.4.3 Profitability management

Question 1

Define profitability

Answer 1

Profitability is the ability to make a financial return from business activities.

Profit = Revnue - costs

To maximise profits businesses need to:

• Keep expense and costs under control
• increase revenues

Question 2

Define cost control

Answer 2

Costs are an outflow of cash from a business. Poor cost control means that profits will be reduced. Businesses need to manage costs by using strategies to manage

Fixed and variable costs

cost centres

expense minimisation

Question 3

Define fixed costs

Answer 3

Fixed costs, such as insurance, interest payments and rent, do not vary in relation to output. To minimise fixed costs it is essential to negotiate satisfactory arrangments at the outset or to take advantage of discounts for early payment

Question 4

Define variable costs

Answer 4

Variable costs, such as raw materials, labour and delivery expenses such as petrol, do not vary according to output. A output increases, variable costs will increase. In some cases savings on these items can be made through bulk purchases.

Question 5

Explain cost centres

Answer 5

Businesses attempt to control costs by allocating a proportion of total costs to particular parts of the business. These cost centres are then responsible and held accountable for the costs that they incur. The business has the advantage of being able to review the spending of cash cost centre and, where appropriate to cut costs by reducing a cost centres allocation of funds

Question 6

Explain expense minisation

Answer 6

Expense minimisation is reducing the costs and expenses in order to maximise the profits and gain a competitive advantage.

Question 7

What are some cost minimisation strategies?

Answer 7

• Outsourcing
• waste minimisation programs
• replacing full-time employees with casuals employees
• sale and leaseback
• replacing labour with technology, where appropriate
• improving labour productivity
• using strategies to reduce inventory overheads, such as implementing a just in time inventory system
• improving budgeting and accountability

Question 8

Explain revenue controls

Answer 8

Revenue controls are designed to ensure that there is income flowing into the business on a regular basis. Once this has been achieved, revenue controls aim to increase revenues and, therefore, improve profit levels. Revenue control can be managed through marketing objectives. These include

sales objective

sales mix

pricing policy

Question 9

Define sales objectives

Answer 9

Sales objectives are the link between the marketing plan and the financial plan. Sales targets are set to maximise sales, to increase the turnover of stock and ultimately to maximise revenues.

Question 10

define sales mix

Answer 10

The sales mix is the range of products and services sold by the business. Products with the greatest profit margins and high growth potential are developed while slow-moving profit items are phased out. depending on the types of business the sale mix will either narrow or broad

Question 11

Define pricing policy

Answer 11

setting price is a complicated task and a pricing policy is necessary so that staff members are aware of the business strategy for pricing. The main aim of pricing policy is balancing sales with profits. Low prices will encourage sales and market penetrations but long term cost needs to be adequately covered. setting an effective pricing policy is essential to the success of the business.