If you have a higher income versus expenses can you consider this one as a good indicator in your business?
Answers
Answer:
Reducing costs or increasing revenue can add to a company's net profit figure (bottom line), but it may not improve the company's net profit margin. Consider a hypothetical company that increases annual revenue from $1 million to $2.2 million by increasing its sales staff from five to 15 people with an average salary of $100,000 each. The additional $1.2 million in revenue only results in $200,000 additional net profit and actually reduces profit margins by almost 20%.
Strategies for Increasing Profitability
Another factor to consider is whether increasing revenues or significantly reducing costs is a viable option. A company may already be operating near maximum efficiency in terms of reducing costs, having negotiated the best possible prices for materials, personnel, and facilities. In regard to increasing revenue, a company may be in a market that is so competitive or an economy that is so depressed that increasing sales numbers or raising prices are not realistic goals.