Tips on how to increase your profit margins
Q Can you give me any tips on how to increase the profit margins in my retail business?
A Many business owners think you need to increase sales substantially to make more money. But often that's too difficult, especially in the short term.Take, for example, the prospective client I met a year or so ago that was in difficulty. He was intent on focusing on increasing sales to his customers. I told him of 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.
Here are 10 tips to help you:
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 stock figures or working from the figure in your last Annual Financials. Prepare some interim accounts to the last month-end. 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, in addition, 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.
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. 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 their margins. At a margin of 50%, if you discount your prices by 10%, you need a 25% 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, 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?
9. Watch supplier bills: Check these 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 stock systems: Keep track of your stock. You'll find you have less working capital tied in stock, 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.
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