Many business owners are so busy running their business they don’t take the time to delve into their numbers and unscramble them into meaningful figures. There are key areas which impact the profit and are often overlooked.
1. Gross Margin vs Mark-Up.
Mark-up is the percentage by which you increase the cost of the product or service to obtain the sales price.
For example. If the product costs $ 50 and you have a 50% mark-up, you would sell the product for $ 75.
The Gross Margin is the sales price less the cost price as a percentage of the sales price.
For example. If the sales price is $ 75 and the cost price is $ 50, then the Gross Profit is $ 25. Thus the Gross Margin is 33% calculated as $ 25 as a percentage of $ 75.
Be aware that a 50% mark-up does not mean that you are making 50% on the sales prices. In fact you are only making 33% Gross Margin.
Discounts are insidious in a business and can quickly send you broke, or at the minimum, cause a cashflow crisis. This is because you may think you are making more profit then you are and so happily give away a 10% discount without realising the consequences.
For example. A 10% discount on a sales price of $ 75 gives a discounted sales price of $ 67.50. The cost of the product is still $ 50, so now the Gross Profit is $ 17.50 with a Gross Margin of 25.9%.
In some cases the $ 67.50 becomes the new standard selling price and then a week or two or a month later, you offer another 10% discount which makes the sale price $ 60.75. The cost of the product is still $ 50, so the Gross Profit is $ 10.75 with a Gross Margin of just 17.7%. Now the business is down $ 14.25 of revenue on each sale.
3. Review of all expenses
Every year at a minimum, but every quarter is better, go through every expense line in the profit and loss account and go into the detail of each.
Ask the questions:
- Do I have to spend this money to keep the business going?
- Do I get any return on this cost?
- Can I negotiate a better deal or contract with the supplier?
- If I didn’t continue to pay for this item would it matter?
If your answer to any of these questions is no, consider eliminating the expense or getting that better deal. You may be pleasantly surprised the amount you may be able to save each month. And every dollar saved in expenses is a dollar more profit for your business.