Profit, simply put, is the gap that exists between a firm’s revenues and its expenditure. So, as long as the company is able to increase its revenues at a certain rate and its expenditure increase at an equal or lesser rate, the company’s profits are likely to improve – this is a layman view of things. Revenues are, in turn, dependent on volume and price.
Now, in a recessionary economy, there is a sure slump or stagnation expected in demand for almost all types of goods and services, so the volume is unlikely to go up. The prices can only go down in midst of low demand and competition so both the multipliers on which revenues depend are likely to shrink i.e. most companies are bracing for a deceleration, if not, decline in revenues.
However, this is where the management has to show its knowledge and skills to the stakeholders – ok, we know that there is a crisis situation but that is what we were hired for….if it were all smooth and easy, why would professional management ever be required…
This is where cost-cutting, production efficiency and smarter financial management can help. Increasingly, business analysis and financial benchmarking tools such as Business Scorecard and Industry Metrics are being used by industry leaders seeking to sustain and enhance profitability. By highlighting areas of operational and financial inefficiencies, and presenting industry benchmarking and best practices data, these financial intelligence tools are helping managers to control costs and thus, maintain or even enhance the gap between revenues and expenditures.