Importance is explained with the help of an example. A company XYZ Ltd. has a revenue of 100 units with a profit percentage of 10 (Profit = 10 units). Let us say the company saved 1 unit as a result of minimal saving measures. Now the total profit is 11 units.
To have the same increase in profit by doing more business, the business has to be increased by 10 percent. Increasing business will require a great deal of overhead and increase of expenditure. Increase in profit through cost-cutting is a simple process to show increasing margins.
In cases where the markets are saturated, increase in business will be lot more challenging. It requires extensive work on the organization's part. Under such circumstances, simplest way to show increase in profits to wall street is to implement cost-cutting measures.
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