Company Earnings

Company earnings, or profits, are the reason for being in business, but maintaining a profitable operation is not so easy. Understanding and balancing the critical factors in profits often requires adjustments in inventory or accounts receivable or sales volume or sales price. Management must track these elements and increase here and decrease there to keep the business on a profitable path.

If, for instance, company earnings reports indicate profits are faltering, fixed expenses might be a tempting place to start cutting back. This is a drastic course, however, for it involves laying off employees or selling capital assets, such as buildings. A more palatable and manageable area might be sales volume or contribution margin per unit.

Adjustments for Profit

Contribution margin affects operating earnings because it revolves around the cost of making a product. Deducting variable expenses from sales revenues results in contribution margin. Total contribution margin is the figure that relates to profit before fixed expenses are subtracted.

Increasing profit may involve many adjustments in many areas, but the major factors are: improve the contribution margin per unit, improve sales volume, and decrease fixed expenses. Rather than cutting fixed expenses, more effective methods include cutting production costs to get a more favorable contribution margin per unit, or looking at lower sales price or associated marketing costs. Neither might be easy, but they are both preferable to downsizing, which means cutting fixed expenses.