Does reducing your costs increase profits?
Posted on 9th July 2018 at 12:18
Most business invest heavily in resources to achieve greater revenue growth, yet relatively little effort is expended on a structured approach to cost reduction.
Cost reduction can make an important contribution to the bottom line. To illustrate the point, lets take a manufacturing company with £100 million PA turnover, with raw material spend £60m, fixed £20m & other inc labour £10m.
Scenario 1 - Increasing sales by 10% £110m - the company will need to spend 10% more on material £66m & 10% more on other inc labour £11m total costs inc fixed £97m - gross profit £13m (30%)
Scenario 2 - Reducing material spend by 10% £100m - the company will need to spend 10% LESS on material £54m & no more on other inc labour £10m total costs inc fixed £84m - gross profit £16m (60%)
From this very basic example each additional £1 earned through sales volume growth will deliver 30% additional profit, however each £1 saved by reducing raw material costs flows directly to the bottom line, with a staggering impact of 60% additional profit.
With a proven background in delivering purchasing savings, Pro Outsourcing use MCIPS qualified staff to implement cost reduction projects that make a real difference.
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