5.4 Improving cash flow and profits

Question 1

Ways to increase profit and profitability

Answer 1

• Reducing expenditure on fixed and variable costs
• Increasing the selling price per item

Question 2

What are the challenges of improving profitability

Answer 2

• Reducing expenditure on fixed and variable costs can reduce quality = reduce sales = reduce revenue
• Increasing selling price can deter customers from purchasing products which can decrease sales volume and market share

Question 3

What are the challenges of improving cash flow

Answer 3

• Removing / reducing trade credit periods for customers can reduce customer satisfaction which may reduce sales volume and market share
• Asking suppliers to increase trade credit periods can create tensions between the business and its suppliers which may result in poorer relationships and reduce dependability

Question 4

How is increasing the selling price per item likely to affect profit per unit sold if the price elasticity of demand is -5

Answer 4

Revenue decreases