Directed to production at lowest costs, the firm typically sees the problem not as a whole target but as means of solving much more general problem - the maximization of profit. This is the main goal for any company, even if it is not formulated as a leading motive for its activities.
In some cases, firms can aim not at maximizing profits, but other tasks, such as increased sales, achieving social recognition and for implementation of those tasks it sacrifices some part of its profits. Such motivation of firm’s behavior is called satisfactory behavior. However, even in this case one is in need of maximizing profits, at least in the long run, because only the desire for profit will rationally allocate resources, ensure high efficiency and, consequently, will allow successful implementation of the selected goal.
Profit maximization for the firm means finding ways to obtain maximum economic profit, thus the difference between total income and overall costs.
Pm = TR - TC
Pm - total or net economic gains;
TR - total revenue, defined as the product of the number of goods sold by its price;
TC - total costs, including both direct and indirect.
If the production and sales will be increased, then at constant prices the total revenue and total costs will increase: revenue - due to increased amount of goods sold, cost – due to the law of diminishing returns. Profits will occur as long as income growth will exceed the increase in costs, and its size will depend on the ratio of these quantities. Therefore, to solve the problem of profit maximization, it is important to consider not common, but limit values of the indices considered.
The amount added to the total revenue from each additional unit of output, would be a marginal revenue. And marginal costs are those costs that are added to the total costs with each unit of output.
As long as marginal revenue exceeds marginal cost, the firm makes a profit and, hence, it makes sense to increase output. But when the increase in income from the last unit of output equals the growth in production costs of this unit, the growth of production should be halted, because the increment to profits will be zero.
It is possible to formulate a general rule of profit maximization: The firm will increase output until the moment when additional costs of producing an additional unit of output equals the marginal revenue from its sale. This is called the rule MC = MR.
The difference between the MC and MR will be a marginal profit (PM) which was received from the sale of each additional unit of output. If MR> MC, PM indicator will be positive, indicating that each additional unit of output adds a part to the total profit. When the MR and MC equals to each other it will mean that PM = 0, and the total profit at this point reaches its maximum. Further growth of production would exceed the MC over the MR and PM takes negative values. In this case, when the marginal profit becomes negative, the firm can increase its overall profit by reducing the level of output.
Making decision about investing capital and about output of production, the firm can also focus on the average profit rate, which expresses the amount of profit per unit of output (Pm) / Q However, it should be borne in mind that the maximum average profit and the maximum total return does not match (https://revolution./economy/00006603_0.html).
What are other ways of increasing income for an enterprise?
Very often small business owners devote all their time working with every aspect of the company. Such deep involvement has its advantages, but if they do not interrupt and do not focus on the factors affecting the profitability of the company as a whole and in detail the result can be lower rates of profit.
The challenge to increase profitability requires the owner of the company to withdraw from daily activities and analyze the activities and financial statements of the company with an independent point of view, or in other words, as a third party. In this regard, accounting records are very important, as well as financial statements for evaluation of company’s history of commercial activities.
If the company's financial statements did not reflect the latest data, the financial records must be updated. This can be done either manually or using appropriate accounting software. This problem is often takes place in small businesses, because statements usually are prepared at the last moment and solely for tax purposes. Small businesses may be limited to simple accounting spreadsheets, while medium-sized businesses are encouraged to adapt more complex software.
One should make a list of strengths and weaknesses of the company by examining every aspect of its activities, including sales and procurement, cost management, personnel and financial control. Using financial records, evaluation under these various aspects by elements should be made. The list should be as detailed and exhaustive as possible, since based on this list the program of actions will be created on which, in turn, will be built the business
Past and current turnover, divided by product, by sales volume and sales prices are among those elements. Analysis of costs is carried by the type and breakdown of direct purchases, operating expenses and ongoing overhead expenses such as costs for rent.
Another important element is the assets and liabilities of the company. One should make a list of major long-term assets and their relevance and importance to the company. Working capital is - the difference between current assets, such as: cash, bank accounts, inventories and accounts receivable - and current liabilities, such as: accounts payable, borrowings
After analyzing the operational and financial aspects, and by listing the strengths and weaknesses, one is able to begin learning how on the basis of past financial indicators derived from accounting records can be formed future financial plan.
Company’s management should examine turnover, defined as sales of existing products and related products, as well as potential new products; examine the sales prices and the relationship with key customers and how you can attract new customers. Based on the analysis, create a plan to increase sales, preferably directed to those products and product groups, which will give the highest gross profit
Important role is played by sales channels. While the company may already have multiple sales channels in the past, perhaps this potential was not fully utilized. One should explore the strengths and weaknesses of each existing and other potential sales channels.
Other areas that require attention include: selling prices, maybe there is an opportunity to raise some prices. Studying of existing customers can point out where and how you can increase sales.
Another important element is costs management. Examine the database of suppliers and the possibility to find cheaper and better suppliers. Most small and big companies always have the opportunity to reduce the costs associated with the purchase.
It is required to consider and financially assess the actions of management, prepare financial projections of the budget business plan, supported by the description of the measures to be taken to improve profitability, regularly check progress and its influence on the rate of return. With the passage of time and with the emergence of new opportunities may become necessary to adjust or revise the current actions or program of actions (https://business.damotvet.ru/small-business/1012838.htm).
Conclusion
Resources of income for enterprises are: net income from selling of products (providing services), profit from financial and ordinary economic activities, extraordinary profit.
The rights and opportunities of allocation and using the income are very important for any enterprise because income is the main source of financial, production and social development, financial development of its employees. The order for income allocation and utilization for commercial enterprise are defined by the methodology of income that is accepted in particular society at this stage of its development. Current order of income allocation corresponds to current stage of market relations development. The income should be allocated between owners, investors of the enterprise and government (as taxes). Common to all businesses regardless of ownership and types of activity is the distribution of profits in accordance with the statute and the collective agreement for the following purposes: payments to the budget, contributions to the non-budgetary funds, the formation of the accumulation fund, establishment of a fund of consumption, charitable purposes, other purposes (saving for the purchase of property, etc.).
There are several types of costs: explicit costs, implicit costs, fixed, variable and semi-variable costs.
One of the ways to decrease the costs is reducing the costs of production by the use of scientific and technological progress;
improving the organization of production on the basis of productivity increase through reduction of working time wastes; state regulation of economic processes. Another way is creation of the system of effective control over costs, which is consisted of cost accounting, staff’s support of cost accounting system, analysis of the causes of costs in the company. There are also some tips to reduce costs like categorization of expenses by clearly defined categories, focusing on the most significant costs, planning and implementation of cost reduction. Besides ways and tips for reducing the costs one can use special approaches to do it: 1. Know the measure, 2. New or old partners, 3. Horizontal integration, 4. Vertical integration, 5. To buy or produce, 6. Rent or own, 7. Forms of payment, 8. Tighter control, 9. Optimization of technological processes.
To increase the income one can use the general rule of profit maximization: The firm will increase output until the moment when additional costs of producing an additional unit of output equals the marginal revenue from its sale. This is called the rule MC = MR.
More general ways are focusing on the factors affecting the profitability of the company; evaluation of financial statements; the financial records must be updated; making a list of strengths and weaknesses of the company by examining every aspect of its activities and a list of major long-term assets and their relevance and importance to the company; company’s management should examine turnover and sales channels.
List of used literature
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