Feeling like you are stuck in a rut, unable to substantially grow your sales or profits in your business? For most businesspeople, the solution is to redouble their efforts at customer acquisition so as to ramp up their sales. But customer acquisition comes at a cost. At the end of the day, you may end up growing your list of customers without seeing a substantial boost in your profit margins.
Before you start off on a journey to grow your profit margins, you need to benchmark. Determine what the margins are for other businesses in your industry with the same business model as yours. Is your business performing to type or are you performing below the industry benchmarks? If the gross profit margin in your industry is something like 20% and you are doing 10%, you are definitely doing something wrong.
You need good margins in order to continue paying your suppliers, paying your employees, rewarding your investors and growing your business. The margin is basically a measure of the profitability of your business. The better the margins, the more profitable your business is and there are ways in which you can add small tweaks to your business operations and boost the margins without having to boost the sales, add more staff or increase the business operating expenses. Let’s look at some simple ways to ramp up your profit margins:-
Know your gross profit margin
If you are running a business and have no idea of your gross profit margin, you are groping in the dark. The gross profit margin refers to how much money you are left with from every sale after you have deducted what it cost you to produce the product or service.
The gross profit margin gives you an indication of the money you are left with after you have footed all the other costs including the cost of producing the good, fulfillment costs, marketing costs, sale costs and fixed business overheads.
It provides you with a bird’s eye view of your business. It shows which of your customers or products give you the best margins. It is a highly strategic number that you can use to plot your business strategy moving forward. For example, you can use your gross profit margin to decide which products are dragging your profits down and phase them out from your inventory.
Don’t just work with your overall gross profit margin. You have to differentiate further and determine the gross profit margin for each segment of your business. Analyze the margins for each product, each product category, each supplier, each business division and even for each customer category. This will give you a comprehensive overview on how each of your business segments is performing.
Use good accounting software or a professional accounting firm Melbourne has to help you get the most up to date gross profit margin for every vertical in your business. An accountant Melbourne practice can also assist you in benchmarking your gross profit margin to the industry average to help you determine whether you are underperforming or performing above the par.
Cut out the low margin units, products or clients
If you have done a margin analysis and determined the divisions, products, clients or services that give you consistently lower margins, then you can phase these out of the business. It can be a difficult decision given that the products or services that you sell will come to define your brand. However, if you have other high-margin products in your inventory, then it will be the best decision you will ever make. The same applies to your customers. Some will be high margin clients while others will be low margin clients or even negative margin clients. The negative margin clients actually cost you money to retain!
Work on a customer retention strategy
Customer attrition is very costly because of the high cost of acquisition of new customers which is a liability for your business. If you losing too many customers, identify the “drop off” points where you are losing them and work out a retention strategy. There are various aspects of your business that you can strategically reinforce in order to improve your customer retention.
Avoid an Aggressive Pricing Strategy
A strategy used by some businesses to gain an edge over the competition is by competing based on price. The downside is that you cannot sustain low prices over the long term otherwise you are going to run your business to the ground. If the pricing has been your only unique selling point, your customers will run to the competition when in the future you decide to raise prices in order to sustain your business. A better approach is to differentiate your products and services by offering your customers superior value.
Too much wastage will eat into your profit margins. It is therefore important to interrogate the source of wastage in your business. For example, could it be a production quality problem? How good is your forecasting? How much of the losses are due to damage or pilferage? If there is wastage, try to make sense on where this is coming from and then put in place corrective measures.
Discounting is another price-based strategy that businesses utilize to increase the velocity of their transactions. However, unless you are getting generous discounts from your suppliers, discounting is going to seriously hurt your margins. If you are discounting, you are going to need to ramp up the sales just to stay on your feet otherwise you might soon find yourself in the red.
Use Good Inventory Management Systems
Talk to a professional accounting firm Melbourne has to help you incorporate a robust inventory management system for your business. With good inventory management, you will suffer from less pilferage, less obsolescence of stock and in the end you will have less of your capital being tied up in your inventory.
Good inventory management also means more efficient accounting. Instead of having an accountant Melbourne professional pouring over your receipts and invoices at a significant cost to your business, you can simply check the cost of your goods with the click of a button.
Expanding your sales will undoubtedly boost your margins but at a significant cost in manpower, marketing and overhead costs. However, the best and easiest route to bigger profit margins is by making the most of what you currently have.