Types of Expenses That Should Be Cut To Optimize Profits That Managers Should Know
Profit optimization is always a problem that needs to be solved throughout the business process. Simply put, optimizing profit means increasing the balance between cash inflows and expenses.
Keeping a healthy cash flow is crucial for SMEs and startups to face arising market challenges. To successfully optimize profits and increase revenue, the managers need to pay close attention to existing costs to determine the most appropriate direction.
Are all business expenses necessary to maintain?
Business expenses are divided into two categories:
- Fixed costs are fees that are not affected by any business life cycle effects and
- Variable costs are fees that increase or decrease depending on a specific time.
In particular, fixed costs are more difficult to cut because they are closely linked with business activities such as rent, tax, insurance, loan interest, etc.
The costs will be divided into management costs and production costs for raw materials, factories, and many more for manufacturing businesses.
It seems that all fees are essential for the business to operate. However, with the current volatile economic situation, managers need to be very alert to manage these costs well.
So, what costs can be cut to maximize profits?
Excess production or service costs
A company with many non-key products can easily cause a surplus of raw materials. Although this does not significantly affect the cash flow, if we can reduce what is not needed, the business will save a considerable amount of money, and consequently, the profit is also optimized.
Another situation is the output is much higher than the sales. This leads to the waste of materials, occupying warehouses, and even reducing the quality of products when they are in stock for too long.
Ineffective PR campaigns
PR campaigns help businesses promote sales revenue but are not always the best tactic.
For small and medium-sized businesses and startups, focusing on PR activities can increase brand awareness on the market, but a wise CEO will always know when to "burn money" and when to preserve capital.
Promoting PR activities without a specific strategy will lead to business exhaustion. Before reaping the results, the money is already burned.
Expenses for unnecessary personnel
For small and medium enterprises, the more streamlined the operating process, the more advantageous it is. Under economic volatilities, having a lean procedure will help businesses adapt more quickly and efficiently, minimizing financial waste on unnecessary "gears."
For example, the division of separate departments helps employees work best at their own duties, but it also makes the operating process cumbersome.
Therefore, at the early stage of starting a company, there should be measures to optimize each personnel position to save costs and avoid wasting resources.
Depreciation costs of excessive promotions
Promotions and discounts are effective programs to boost sales at particular times, but many companies abuse them as an indispensable sales tool.
If the market value of the service is $500, but the actual revenue that can be received is only $250, this is also considered a large depreciation charge.
Managers need to consider drawing up more innovative sales strategies to maximize revenue without spending too much on promotions to optimize profits.
This fee cannot be measured directly in money but will negatively impact the long-term operation. If the business activities fall into a state of "pending," it proves that a waste of time is taking place.
The excess "pending state" will slow the company's business progress. Therefore, managers should consider a plan to help companies optimize working time to increase efficiency and productivity, and eventually, the profits will be more optimized!
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