Do you measure Key Performance Indicators in your business? KPIs are measures of performance within your business, which can have a big impact on your profitability and cash flow. These could include, for example, revenue per customer, lead generation and conversion rate, and gross profit margin just to name a few. Today I’d like to share with you some information regarding your gross profit margin, and tips for improving this.
Your gross profit is calculated by deducting your direct costs (such as stock purchases and raw materials) from your turnover. Your gross profit margin is simply your gross profit as a percentage of your turnover.
It is important to have a good reporting system in place so that you can accurately measure your gross profit margin. What you can measure, you can manage.
Once you know what your gross profit margin in, how do you know if it is a good result? You could compare it to an appropriate industry benchmark, the ATO small business benchmark for your industry, and also your previous periods in business.
Do you think there is room for improvement in your gross profit margin? You may be surprised at the impact that even a 1% improvement can have on your overall profitability and cash flow.
Here are 5 ways to improve your gross profit margin.
1. Better pricing
- Do you have scope to increase your prices? Have you been passing on increases in supplier costs to your customers? Customers can often be more sensitive to price increases on particular product lines or services so if a blanket price increase can’t be achieved, you may still be able to increase pricing on the less price-sensitive products or services.
2. Better buying
- Do you have long term suppliers in place? Do you buy in bulk? In both cases it may be worth having a discussion with your suppliers around any possible discounts they may be able to offer you. Sometimes it can really pay to ask the question.
3. Reducing wastage
- Do you have efficient systems in place? Reviewing these for possible wastage of either time, raw materials or products can identify opportunities to improve your gross profit margin.
4. Reviewing your product lines & service offerings
- Do you have some product or services on which you just can’t achieve a good gross profit margin? Unless these are loss leaders that generate other profitable sales within your business, it may be worth considering a change to your product or service mix to make way for more profitable offerings.
5. Sharing your goals with your team
- By communicating your actual and target gross profit margin with your team, you can include them on your journey to make improvements. Your team members may have valuable ideas to streamline processes and reduce wastage, and you may also be able to incentivise them to achieve this.
At GTC Financial, we love helping small businesses to improve their profitability and cash flow. If you’d like to have a chat about how we can help you, please feel free to get in touch.