4th February, 2021
Many business owners think you need to increase sales substantially to make more money. In reality, that’s the more difficult path to boosting profit margins, especially in the short term. Here are some alternatives.
A prospective client was in some difficulty and hoped to increase sales in order to lift profit.
He kept on and on about increasing sales to new customers. But I worked out that his average sale per customer and his prospect conversion rate were so low that he needed 3,750 meetings with prospective customers in the next year just to get back to breaking even.
There’s another way to make more money, which 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?
At its simplest, your profit margin is the degree to which you’re making money. To calculate profit margins for your business or any given activity, you’re dividing income by revenue.
So, with this in mind, here’s how to lift profitability by boosting your profit margins.
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.
Get some benchmarking figures from your accountant. How does yours compare to the industry average?
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.
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!
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?
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!
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.
It’s normally a much better deal than trying to delay payment, even if you’re borrowing.
Whether stolen by staff or customers, losing cash is very costly.
Do you have anti-shoplifting or theft prevention systems in place, even for staff? Do you balance your tills? Who does your banking?
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.
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.
Increasing your margins is all about making the most of what you sell right now. As Jay Abraham, the marketing guru would say: “Get everything you can out of all you’ve got!”