Improving Cash Flow & Profits
Business: AQA A Level (2023 Specification), topic 5.4.1
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.
- 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.
Test yourself on Improving Cash Flow & Profits
How is increasing the selling price per item likely to affect profit per unit sold if the price elasticity of demand is -5?