Improving Cash Flow & Profits

Business Management: IB Diploma, topic 3.5.3

Improving Cash Flow and Profit

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

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.

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.

How is increasing the selling price per item likely to affect profit per unit sold if the price elasticity of demand is -5?