FMS - profitability management strategies Flashcards
profit
revenue – costs (to increase profit increase revenue or decrease cost)
profitability management
o Profitability management involves the control of both the businesses cost and its revenue
To ensure profitability within a business, managers need to be able to:
o Control costs(ultimately and reduce them) and/or control revenues (and ultimately increase them)
cost controls
o Most business decisions for example, to open a new store of buy a new piece of machinery – are influences by costs. The costs associated with a decision need to be carefully examined before it is implemented
Three questions have to be asked and answered;
- Are these costs fixed or variable
- What is the source of these costs
- How can we minimise these costs
fixed costs
o Before a business can control its costs, management must have a clear understanding of what those costs are
o Fixed costs are not dependant on the level of operating activity in a business. They do not change when the level of activity changes and must be paid regardless of what happens in the business
variable costs
Before a business can control its costs, management must have a clear understanding of what those costs are
Variable costs are those that change proportionally within the level of operating activity in a business
what can financial managers do?
o Changes in the volume of activity need to be managed in terms of associated changes in costs
o Variable costs are easier to control than fixed costs in the short term
o Fixed costs can be negotiated in the long term but are often stubborn
cost centres
o Once the nature of the cost is determined, management needs to be able to identify the source of this costs and their amounts
o A number of costs can be directly attributable to a particular department or section of a business and these are termed cost centres
o Direct costs are those that can be allocated to a particular product, activity, department or region
o Indirect costs are those that are shared by more than one product, activity, department or region
o Less relevant department to sales of COGS
expense minimisation
o Profits can be weakened if the expenses of a business are high, as they consume valuable resources within a business
o Once you have identified the type, source and amount of costs you need to minimise these
o This can be done by effective implementation of operations strategies
relevant operations strategies
o Supply chain management
o Inventory management
o Outsourcing
o Leading edge technology
revenue controls
o In addition to controlling costs, profitability is achieved through controlling revenue
o In determining an acceptable level of revenue with a view to maximising profits, a business must have clear ideas about its marketing objectives
marketing objectives
o Producing strategies – extending popular product lines and discontinuing unsuccessful/unpopular products
o Pricing strategies – cost plus pricing or price skimming for unique products and services
o Conducting a break-even-analysis to ensure the sales volume at which revenue is greater than costs.
