Profit: profit maximization conditions

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

This article will talk about profit, profit maximization conditions and how different types of enterprises need to operate in the market.

Everyone knows that a business should bring not only income, but also profit. Otherwise, it is considered ineffective. Only those enterprises that are state-owned or receive financial assistance from the state, non-profit can afford to operate at a loss. All other forms of business are designed to bring benefits to their owners.

At the same time, it is rather difficult to obtain the necessary profit, the conditions for maximizing which are to increase the sales market and reduce costs, especially in sectors where competing enterprises are well developed.

Break-even point

Profitability can be measured from the breakeven point. It shows the boundary level of all costs for the production of a certain volume of output. If the level of income is less than this point, then the enterprise is unprofitable. In the case when the level of income corresponds to the break-even point, the company covers all its expenses, but does not make a profit. And only whenreturns above this cut-off point, it makes a profit and is considered cost-effective.

It is quite difficult to make a successful enterprise in today's market: a high level of competition, an imperfect legal framework, monopoly sectors of the economy. Due to such circumstances, breaking up and being profitable is hard enough for a new venture.

Management personnel must know what profit consists of, the conditions for maximizing income and reducing costs.

Some manage to overtake in a few years the scale of many large companies that have been operating since the 90s. How do they do it?

Production needs to be optimized

Having information and knowledge about profit, profit maximization conditions, managerial management allows you to optimize all work processes, following the golden rule of business: minimizing costs and maximizing income. If the actions of managers are aimed at achieving such a result, then the success of the enterprise will not be long in coming. Although in an unfair competition market, this alone will not be enough, as there may be tricks on the part of competitors that contribute to the unfair distribution of resources, capital, supply and demand in the market.

Different sectors of the economy and types of enterprises have their own necessary knowledge about profit, the conditions for maximizing which will differ to one degree or another.

What does a simple firm need to know?

If we consider a small firm,which provides services, for example, for the installation of windows to individuals, then it needs to understand that it operates in a market that is crowded with competitors. What will be the conditions for maximizing the firm's profit?

In fact, all companies that install windows are customers at the same window manufacturing plants. But you know from your own experience that for different companies, the cost of installation, along with the price of windows, differs by far from 100 rubles. Why is this happening? Of course, each company has some agreements with manufacturing plants, which determines the cost of the product itself for each buyer. In addition, to cover its costs, the company includes the necessary level of profitability in the cost.

Restructuring to help

In order to cut costs, the first step is to restructure the firm. There should not be superfluous personnel who do not pay for themselves with their work. It is necessary to calculate the load for each installation worker, operator, cashier and other employees.

After that, the level of costs for the maintenance of fixed assets should be identified: rent of premises, electricity, electricity, water, telephone. There is always an opportunity to save: if the rented room is too big, then give it up in favor of a smaller one that will be cheaper.

100% worker utilization boosts productivity

Also, to maximize profits, it is necessaryload workers at 100%, there should be no production downtime.

In a saturated market, businesses have a great need to occupy as much space as possible in the market, they experience a very high level of competition. The main condition for maximizing the profit of a competitive company is the quality of the product and lower cost, such methods can quickly increase profits.

In order for the firm to receive the necessary profit, the maximization conditions listed above are best observed and taken as a whole.

What does a monopoly company need to know?

Monopoly is considered a type of imperfect competition. Related to this is the presence of special conditions, the observance of which can lead to profit maximization.

In economic theory, there is an opinion that nothing can force a monopolist to improve, except for the state. By and large, this is true, but the owners of the enterprise themselves can demand large profits from management personnel, which leads to the inevitable optimization of both the structure and production processes.

Lack of competition slows down normal development

Due to the fact that there are no special competitors, the quality of products is given the least attention. Because even if some characteristics and qualities of the product deteriorate, they will still buy it, since there are no substitute products on the market.

Therefore, the main condition for maximizing the monopolist's profit is a gradual reduction in the level of costs. These can be both production costs and general production and administrative costs.

Need to reduce production costs

In order to reduce production costs, such enterprises introduce new technologies, with the help of which it is possible to produce more products in 1 unit of time, while spending the same or less resources.

Also, a monopolist can automate production as much as possible, which will reduce labor costs by firing employees who are no longer needed, thereby increasing their own profits.

The conditions for maximizing profits and minimizing costs that are suitable for such an enterprise are also applicable to other business structures, but not all methods of the latter are suitable for monopoly enterprises.

Do not forget that the state watches over monopolies around the clock, so they need to take such actions without leaving the legal field.

Summing up

Maximizing the company's profits involves certain actions on the part of management aimed at increasing revenues, as well as reducing production costs. The following conditions can be distinguished, which apply to all organizations:

1. Bring the structure of the workforce of the enterprise to the optimal form. Each employee must work out his workplace and have a full workload throughout your working day. At the same time, there should not be such links where there is one boss for one or two workers.

2. Achieve maximum output that does not incur additional production costs.

3. Achieve maximum cost savings. This can be done by introducing new mechanisms that will speed up the production process or reduce the number of costs per unit of production.

4. Find the best suppliers of raw materials, materials. The resources necessary for production must be purchased from those organizations that can offer good quality products at an adequate price.

In addition, depending on the industry and sector of the economy in which a particular enterprise operates, there are other requirements that must be met to increase the efficiency of economic activity.

Following these rules, the company can achieve profit growth, and in the near future. The main thing is to have a strong desire and start changing today, which not all organizations are capable of.