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Sell Less - Make More Money!

In today's business news, it's surprising to read articles about large corporations that have increasing sales, but decreasing income. This prompts the question, how is it possible for a company to sell more but make less?

 

Business managers often assume increased sales result in increased income, but this correlation is not always accurate. In fact, it is not that unusual for a company to experience a decrease in income when there is an increase in sales.

 

This can happen for several reasons, but the most common are as follows:

 

Low Pricing
Companies will create a problem when they price their products or services too low to cover their variable and fixed costs. Also, if companies lower their prices to increase demand, this can backfire if the fixed expenses cannot be reduced.

 

High Fixed Costs
When sales rise, a company's per unit cost can decrease due to economies of scale. However, the company will become vulnerable. Maintaining high fixed costs may be the solution, but doing so may result in smaller profit margins when sales fall. The best scenario is to have as many expense variables as possible because these provide companies with greater flexibility. Additionally, variable costs provide companies the ability to offer the lowest price possible with expenses matching the sales cycle.

 

So how can a company convert fixed costs into variable costs? The first step is to review the fixed costs.

 

Most growing companies tend to increase their staff quicker than they should, especially when payroll is one of the largest expenses companies will incur. To increase variable costs, consider reducing headcount by utilizing contractors instead of full-time employees. Also, paying employees hourly instead of salary is a great alternative for controlling labor costs.

 

Similarly, when a company increases production and staff, more equipment may become necessary. Rather than purchasing equipment, consider leasing options. Lease payments are often lower than purchase prices, and their implementation can help conserve cash for other uses, such as payroll and payables.

 

It's also important to evaluate unnecessary fixed costs. If the company has fixed costs that are redundant or nonessential, determine ways to consolidate them. For example, if the company has various locations, try to merge the goods and services that keep each location running properly. Instead of making every location procure their own items, negotiate with vendors to purchase materials for the entire company. This strategy will help control and reduce costs.

 

Sales
Before a business attempts to sell as many widgets as possible, it should assess the profitability of each line item to establish a practical selling strategy. Consider if scarce resources can be allocated to produce higher yielding line items rather than lower yielding ones. By doing so, the company can acquire a more distinct and profitable sales plan.

 

Understanding the company's operating costs is essential for effectively controlling them. By modifying fixed costs and developing a valuable sales strategy, the business can better adjust to fluctuations in sales. Whether they are up or down, the company can still acquire profits and prosperity.