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Tuesday, October 18, 2005

Profit Drivers

One of the toughest challenges smaller companies face is learning how to manage their financial performance. Entrepreneurs often think that great financial results just "happen," but that is seldom the case.

Following is a list of the key profit drivers (from the Accounting Blog) for most companies and an explanation of why one driver in particular (price) is far more important than all the others.

For most businesses, there are four major profit drivers:
  1. Price
  2. Variable Costs (i.e. those costs that vary in direct proportion to revenue, typically represented by cost of sales)
  3. Fixed Costs (or overhead)
  4. Sales Volume
In other words, these are the underlying issues that directly determine your company's financial performance. If you want to increase profitability, then you have to work on these areas.

BOTTOMLINE: Far and away the most effective strategy for maximizing your company's profit is to aggressively price your products or services, elect to deal only with those customers who see the value that you deliver to them, and not allow price-sensitive customers or competitors dictate your company's pricing strategy across the board. Revenue does not pay the bills or give you the resources you need to grow- that comes from profit.

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