10 ways to increase your profit margins
Many business owners only focus on increasing sales substantially to make more money. But often that’s too difficult. In order for you to serve your customer, pay your employees and reward shareholders or investors, your business must be profitable. And your margins are a measurement of your profitability.
Besides increasing sales, there’s another way to make more money, that is to increase your profit margins. Same customers, same level of physical sales, same systems, no more staff or extra overhead costs, existing premises and capacity—isn’t that a thought?
Here are 10 tips:
1. Figure out your gross profit margin
Make sure you know your up-to-date, overall gross profit margin. It’s no good using estimated inventory figures or working from the figure in your last Annual Financials.
Prepare some interim accounts to the last month-end from your accounting software. Using the inventory system in MYOB means there’s no need for a stock take.
Get some benchmarking figures from your accountant. How does yours compare to the industry average?
2. Analyse your profit margins
Your overall gross profit margin could be deceiving. Find out the gross profit margin on each of your products and services, and analyse your gross margins over different business divisions, product categories, suppliers or customer categories according to your business. This way you can identify both low margin or loss-making items and profitable activities or products. Then you can stop selling low margin lines and focus on the ones that work.
3. Increase your prices
Yes, I know it can be difficult. But often we business owners are more worried than our customers about price, and, let’s face it, our overheads are going up all the time.
It’s true that you might lose the odd customer, but if your margin is 50 percent, a 10 percent increase in prices means you can lose 17 percent of your customers yet be no worse off!
4. Review all your prices
Do you charge all customers the same price? If so, why? You’ll invariably find that some are less price sensitive than others, especially if they’re not paying for the bills themselves, e.g. government or larger organisations. Have you increased your prices to match supplier price rises and kept up with the competition?
5. No discounting
Discounting can be the death of many businesses that don’t realise how badly this destroys your margins. Using the same example as above, at the same margin of 50 percent, if you discount your prices by 10 percent, you need a 25 percent increase in sales just to stand still. Say goodbye to your day off!
6. Don’t compete on price
Differentiate yourself in other ways, whether by giving superior value, going the extra mile or reducing all the other (non-monetary) costs of doing business with you—effort, time, anxiety and emotional costs.
7. Take cash discounts from suppliers
It’s normally a much better deal than trying to delay payment, even if you’re borrowing.
8. Prevent Theft
Whether stolen by staff or customers, losing cash or stock are very costly. Do you have any anti-shoplifting, proper workflow or system in place, even for staff? Who is doing the stock count and banking of cash.
9. Watch supplier bills
Check all supplier bills personally. After a while you’ll get a feel for things which aren’t right. Don’t be surprised to find that you’ve been overcharged for goods or services you haven’t received or been billed at the wrong prices.
10. Use inventory systems
Use the inventory system on MYOB to keep track of your inventory. You’ll find you have less working capital tied in inventory, suffer less theft and stock obsolescence, know when you’re running out of products that are selling well, and know exactly how much each of your products cost you without wading through old purchase invoices. It’s easy, and it works well.
Remember, increasing profit margins is about making the most out of what you sell right now.