How to Increase EBIT While Holding Sales Constant

Outsourcing can reduce labor and overhead costs.
Outsourcing can reduce labor and overhead costs. (Image: Thinkstock/Comstock/Getty Images)

Financial managers spend a considerable amount of time analyzing and understanding their EBIT. EBIT is short for earnings before interest and taxes and is synonymous with net operating income. EBIT is calculated by taking revenue and subtracting cost of goods sold and all operating expenses. The calculation is useful because it provides a look at how profitable a business is before loan decisions and tax considerations are included to arrive at net income. If you plan on improving EBIT while holding sales constant, your only option will be to reduce costs.

Calculate and compile your most recent financial statements and information. Make use of your most recent internal financial information and not just your annual and quarterly financial statements. Also, be sure to obtain at least three years for historical comparison.

Analyze your financial information and your business position. A SWOT analysis is a helpful brainstorming tool used to arrive at an honest assessment of where your business stands. SWOT stands for strengths, weaknesses, opportunities and threats. The method involves applying each of the four categories to your unique business position. Once completed, it can be referenced when choosing potential strategies.

List your tactical options by determining potential cost management strategies. This will involve taking a look at external and internal costs.

Determine if your company can leverage its position to lower purchasing costs. For example, retailers have reduced cost of goods sold by deducting receiving costs from suppliers. Leveraging requires having a strong negotiating position relative to suppliers or a unique capability that competitors cannot offer. Also, review your supply chain to see if there are costs or suppliers that are unnecessary, redundant or can be replaced with a lower cost vendor. This approach is aimed at lowering external costs.

Analyze your internal structure and look for areas where operations can be centralized or more productive. For instance, labor is sometimes redundant or inefficiently organized. Writing out your processes in a flow diagram can help you identify and eliminate or reorganize them. Consider introducing new, long-term cost saving technologies for inventory, production and sales. These systems can greatly increase efficiency, creating costs savings.

Consider the list of tactical options you’ve created and pick a cost reducing strategy. This is where the SWOT analysis is useful. Any strategy you pick should be achievable and align to the capabilities of your company. When outlining the strategy, include your stated goal, benchmarks to access the success of the strategy and plan for implementation.

Tips & Warnings

  • One potential option was intentionally omitted from the steps above: change in accounting methods. This would involve boosting earnings by changing how expenses are recorded in financial accounts. An example would be capitalizing certain expenses and thus making an asset out of a cost. The purpose of choosing accounting methods is to present your company's financial position fairly. To approach changing those methods with the intent of improving earnings is a slippery slope and a breach of business ethics.

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