Improving Cash Flow & Profit

Improving Cash Flow and Profit

Business may decide to focus on improving profit and profitability as part of their aims and objectives.

Objectives

• Profit and profitability can be increased by reducing expenditure on fixed and variable costs.

• Profit and profitability can be increased by increasing the selling price per item.

• For example, in 2015, Morrisons delayered its structure by removing department supervisors which reduced costs to increase profitability.

Challenges of improving profitability

• Trying to reduce expenditure on fixed and variable costs can reduce quality which may reduce sales and therefore also reduce revenue.

• Increasing the selling price can deter customers from purchasing products which can decrease sales volume and market share.

Challenges of improving cash flow

• Removing or 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 tension between the business and its suppliers which may result in poorer relationships and reduced dependability.

• For example, a sofa store wishing to improve its cash-flow may tell customers that they need to pay within 6 months instead of 12 months and this may reduce customer satisfaction leading to customers shopping elsewhere.