Umbrellas or bathing suits? Ways of decrease in costs
the Main question of any business, after sacramental “to be or not to be“ - how to increase profit? Let`s assume, we have a firm making umbrellas. Its profit is equal to proceeds from sales of umbrellas minus production costs. It is obvious that it is possible to increase profit of our enterprise only in two ways: to increase revenue and to reduce costs.
Revenue can be increased besides in two ways: to raise the prices or to increase sales volume. However it is possible to raise the prices only to some limit beyond which decrease in sales volume begins. It is possible to increase sales volumes only to some limit too: or before saturation of the market or as far as competitors will allow.
Ways of decrease in costs exists a little: it both optimization of the taxation, and transition to new technologies, and establishing order in logistics, and wise personnel policy, and many other things. But it is possible to reduce costs only to a certain limit too. Sooner or later we will grope a minimum of costs, and on it it is necessary to stop.
So, it seems, everything is clear: costs are minimum, the prices are optimum, sales are maximum. The profit is increased to a maximum, and on it it is possible to calm down. But there is one tricky question: and what to do if the summer is dry? to
Yes, some factors which are directly influencing profit of our enterprise to us are not subject, unfortunately. But it does not mean at all that we cannot operate profit!
The same reasonings are valid also for the enterprise trading in beach accessories, only the sacramental question will be opposite: and what to do if the summer is rainy?
the decision for both problematic issues Is. Also it is called “Diversification“.
Also there is an opportunity to operate profit, owning both enterprises / productions (a classical example the Yamaha - motorcycles and snowmobiles) and having more - less reliable weather forecast. If the summer hot, production of bathing suits “feeds“ unprofitable production of umbrellas, otherwise - on the contrary. And we operate profit, distributing investments between our two productions, proceeding from a weather forecast.
On this picture example one of features of strategy of management of profit is well visible.