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the Monetary $$$ Reasons for Improvement in Business Operations
The common reason for
companies that do not want to adopt changes, Technologies and
Information Technologies is their high cost.
We can analyze the current business trend and see whether companies can
survive without making any change.
following trends are apparent in today’s business environment. They will
affect the bottom line of companies:
Shortage of Labor
The growth in economy
has caused the shortage of labor in many sectors. The shortages of skilled labor are especially critical.
Rising Labor Cost
The shortage of labor
causes the rising labor cost. This
increases operating costs of the business.
High Turnover of Employees
The rapid change of
business environment couples with the shortage of labor lead to the higher
turnover of employees.
Higher Cost of Operations (Rental, Equipment)
Costs such as rental,
equipment, labor and utilities have been increasing and will continue to
Customers are Less Willing to Keep Stock
The realization of the
problem and costs of keeping inventory has drive companies to keep their
inventory level low. The larger
companies practice Just-In-Time operations and dictate their suppliers to keep
stock on their behalf. The
suppliers will have to improve their inventory management skill to handle the
Increasing Global Competition
Competitors are no
longer just the shops next door. In
the New Economy, the breaking down of national boundaries introduces new
competitors that local businesses have never encountered before.
They are often better managed, financially stronger and pose serious
threats to the local businesses.
Effects of Business Trends
How do these trends
affect the bottom line? Let us use the basic profit formula to illustrate the
Profit = (Price –
Direct Cost) x Sale Volume – Indirect Cost
Profit of a company is
the function of Selling Price of the Product/Services, the Sale Volume and the
Indirect Cost of operations. So
what will be effect be?
1. Price - The price of existing products and services will go down due to increased competition.
If we take an example
of a Small and Medium Size Manufacturer (SME/SMI) that has a yearly sales
turnover of $10,000,000, a healthy 40% gross margin and 10% net margin (which is
unusually high nowadays). The
profit formula can be:
(Price – Direct Cost) x Sale Volume – Indirect Cost
($100 - $60) x 100,000 units - $3,000,000
$1,000,000 (10% margin)
What happen if the
costs are increased 10% and the Price is reduced by 10%? When this happened, the
profit will be:
($90-$66) x 100,000 - $3,300,000
-$900,000 (-9% margin)
The changes in price
and costs drive the company to a loss of –9%.
So how can the problem be rectified?
There are generally three common strategies available:
The first two strategies involve investment and higher risk.
Furthermore, it may not be suitable for all companies.
The third strategy is the more common approach to increasing the
profitability. We can find out how much the company needs to produce and
sell to achieve breakeven.
Breakeven = (90-66) x 137,500 - 3,300,000
The calculation shows that the company needs to Increase 37.5% output just
to Breakeven. To achieve the same
profit as before, the company needs to increase its output by 80%.
This is a tall call for any company.
How to Achieve Increase in Sale Volume?
There are two areas
that the company must achieve to increase its sale volume:
The company must build
up its capability to increase production. This
means doing more things and doing them faster without corresponding increase in
After increasing the
production volume, the marketing department must increase the sale of the
company. This can be achieved by
capturing a larger market share or entering new markets.
It has to do it with better services and better response to customers’
The Need for Change
The conclusion is that companies that do not make any appropriate changes will not survive in the fast change business environment. There is a need to improve the management of the company and adopt appropriate technologies in the correct manner to stay competitive.