Every firm or business owner who comes along a hardship in his or her company will try to reverse the situation as much as possible, but without the proper knowledge of the cause of the condition, the attempt to rectify the case will be awkward and next to futile. The manager should know how to remedy the situation considerably and reduce the chances of making losses. The report below gives the causes of the decline in profits and possible remedies to the loss-making (Friedman, M. 2007).
Causes for decline in profits
Low revenues
When a firm spends more than its income, a loss is always incurred, and the net profit is zero. For a firm to avoid injuries and maximise its profits the expenditure must be lesser than the income.
Cost of good
The high purchase of goods that are costly leads to insufficient funds that are necessary to cover the expenses. Goods costs are deducted directly from the sales of the products made, and the remaining cash is after the deductions are left to cover up for the expenses, and this will lead to profit generation in the company. However, when goods costs increase leaving to extra money to cover for the expenses a loss occurs.
Expenses
At times, negative profit margins can arise from high budget estimates. In a case of a period where the expenses go beyond the gross profit, a loss is still incurred devoid of the fact that the revenue targets are achieved, and costs of goods are kept within the estimated margins.
For instance, ABC Company's records show the balances as80,000 dollars for costs of goods and the 40,000 for the expenses a deduction of 80,000from the income of the products sold at 100,000 will result in a profit of 20,000 dollars.
Addressing the erosion of the profits
Reports made in every financial period can help one project income, expense and cash flow and allows one to take steps in managing each required area. Costs are divided into two groups of manufacturing and overhead expenses (Brown, L. D. 2001).
Manufacturing expenses include costs that are directly tied to the production of a god or a service.
Overhead costs are those a firm accrues to run a business for example phones, office equipment and insurance.
Reducing the prices
A reduction of the gross profit margin can be achieved by lowering the price in the sales. Most firms attract more of the customers by giving them discounts and promotions.
The price cut on goods minimises the gross profit and too much offering of discounts from the company will make clients familiar with the decline in prices and will decline to pay cuts.
Industry changes
Product developments that are new and technology advancements impact the bottom lines where change is the order of the day. For example, an introduction of the digital televisions disrupted the market for the analogue TVS which had protruding backs.Developing a new product considering the advancing technology must be weighed against the returns.
Intense competition- increase in rivalry has an impact on the gross profit margin. When the sales reduce, the purchase from suppliers also reduces. Thus, it means that the company loses economic advantages when buying in bulk.
Industry changes- there are industries where change is inevitable due to the technological advancements. The automotive industry faces digitalization since there are modern cars being manufactured. As a result, the cost of developing products that embrace new technology has to be weighed against the potential returns.
Lower prices-At times, a company can opt for reducing prices to get more sales and this can lead to reduced gross profit margin. In an industry where there are many competitors, it will force the prices to go down. Thus, the cost of goods sold will reduce with time since companies have to cut on labor cost.
Higher supplier cost- one of the possible causes for the decline in gross profit margin is a higher cost of goods sold. Suppliers can increase their margins and revenue. Thus, suppliers are forced to charge higher rates for their goods.
Recommendations on improving profit
For a firm to increase its sales, the revenue sales must be higher than the expenditures.
Increase productivity of your staff
Staff should be recognised when they perform well and reward staff contributions and equip them with sales skills on how to manage customers and make significant sales of the product in the market.
Focus on business strategy
The above can be achieved in 3 ways;
Customer intimacy
This is done through customisation to meet each customer's needs as an individual hence building strong and more extended relationships.
Operational efficiency
This is also done through a set of products and services designed to be cost-effective for customers.
Leading edge
The leading edge is about the provision of new and innovative products and services based on modern technology. This depends on having a robust and frequent introduction of new and improved products and services.
Positive feedback to improve performance
This is achieved through proper communication for fast results, and this is the primary key in realizing the changes in the human behavior (Renko, El Tarabishy, Carsrud, & Brännback, 2015).
Training
Trainees background knowledge influences the interpretation, and the workers are active, and involved trainees are critical to success in training, and selective attention is crucial.This is according to the schema theory.
Ratio analysis
Gross profit margin= revenues-cost of goods ×100%
Revenues
2014=2.3-0.92×100%
2.3
2015=1.85-0.79×100%
1.85
2016=1.6-0.70×100%
1.6
Net margin= Revenues-expenses
2014=2.3-0.25
=2.05
2015=1.85-0.25
=1.6
2016=1.6-0.25
=1.35
ROCE=Operating profit×100%
Capital employed
2014=0.86×100%
10.5
=8.2%
2015=0.42×100%
11.0
=3.82%
2016=0.30×100%
11.00
=2.73%
Labour turnover =Number of workers separated per year×100%
Average number of workers on rolls
2014=3×100%
50
=6%
2015=7×100%
47
=14.9%
2016=12×100%
45
=26.7%
Net profit margin analysis
When it comes to the net profit ratios, a high ratio is preferred. A higher ratio means that the company can cope without any difficulties in the economy. A low net profit margin is an indication that the operating expenses are increasing faster the revenues. It also means that the sales have decreased while the taxes and costs remain the same. In 2014, ETCO was doing well since it had a higher net profit margin than its competitors. From the net profit margin calculation, the net profit margin of 2014-37.4%; 2015-22.7% and 2016-18.75%. It is evident that the net profit margin had been reducing over the three years.
Gross profit margin analysis
Gross profit margin refers to the percentage of revenues that can be converted into gross profit. It is used in assessing a firm’s profitability. A high-profit margin is an indication that the company has a reasonable profit. A low gross profit margin, on the other hand, indicates that the company is not able to control the production cost. Based on the calculations, ETCO’s gross profit margin in 2014 was 60%; 2015-57.3% and 2016-56.3%. It is important to understand the causes of the decrease since it will enable the company to find solutions on how to improve its profits. Some of the possible causes for the decrease are higher supplier cost, lower prices, industry changes and intense competition.
Return on capital employed (ROCE) analysis
The return on capital employed is a profitability ratio that is used to show how a company can generate profits using from the capital employed. ETCO’s return on capital employed for 2014-8.2%, 2015-3.8% and 2016-2.7%. The industry ROCE is 9% for 2014, 9.2% for 2015 and 9.5% for 2016. A higher ratio is favorable because it is an indication that there are more dollars being generated for every dollar for capital employed.
Motivation theories
Motivation is a vital factor in improving work productivity. There are various motivation theories which are McClelland, Herzberg two-factor theory and Maslow’s hierarchy of needs.
Maslow’s hierarchy of needs
Maslow’s hierarchy needs are based on five categories whereby the lower needs have to fulfill before the top level needs. The physiological needs are food, shelter, water, and sex. Secondly are the safety needs which are job security, freedom from danger, and health care among other needs. The third category is the social needs which are love, friendship, belonging, and acceptance by a group. There are also the ego needs which are the need for achievement, recognition, prestige, and freedom. At the top of the hierarchy is the self-actualization needs which refers to the potential for continued self-development (Gawel 1997 p.3).
References
Brown, L. D. (2001). A temporal analysis of earnings surprises: Profits versus losses. Journal of Accounting Research, 39(2), 221-241.
Friedman, M. (2007). The social responsibility of business is to increase its profits. In Corporate ethics and corporate governance (pp. 173-178). Springer, Berlin, Heidelberg.
Gawel, J.E., 1997. Herzberg's theory of motivation and Maslow's hierarchy of needs. Practical Assessment, Research & Evaluation, 5(11), p.3.
Renko, M., El Tarabishy, A., Carsrud, A. L., & Brännback, M. (2015). Understanding and measuring entrepreneurial leadership style. Journal of Small Business Management, 53(1), 54-74.
