Increasing sales is great. In fact it’s the number one goal of most businesses, however it’s not enough alone to ensure a growing bottom line. What you need to also focus on is increasing gross profit percentage.
Gross profit percentage is one of the key measures that business should use to assess financial performance. It shows you what percentage of every sale you are earning as profit after allowing for the cost of the product. You then use this gross profit to pay for your overheads – the costs of actually running the business. Higher gross profit will provide you with greater resources to operate your business and lead to a bigger bottom line.
To calculate gross profit you take total sales revenue and subtract total sales costs or cost of goods. If you sell your product for $100 and it costs you $60 to buy wholesale your gross profit is $40. You then divide your gross profit by your gross sales revenue to get your gross profit percentage. Using the example above, you would divide your gross profit of $40 by your revenue of $100, for a 40 percent gross profit.
To increase your gross profit percentage you can use one of three strategies:
- Increase gross profit by increasing sales - this strategy may sound simple but many small businesses fail to follow a strategy to deliberately increase sales. Simple ideas that can prove effective are:
- measure the conversion rates in your business. Start to record customer enquiries and which ones lead to a sale. It’s great to know that for every 100 enquiries you will get X amount of sales. Once you know this you can then work on increasing it
- increase the average sales size. Offer complementary merchandise or bulk buys
- seek referrals from existing customers or related businesses
- Manage your margins - this is where better stock management and buying can improve your bottom line regardless of whether you actually increase sales:
- make sure you do a stock take. If you don’t check you stock, how do you know it has not going missing. Stock can be stolen by customers and staff. One of the best ways to prevent and manage this is to regularly check it
- forecast and plan your inventory more efficiently. Many small businesses suffer lower margins due to spoilage and waste. Work out how much waste you should have in your business and measure against this figure. You may get a surprise
- make sure you check all stock that is received. This will ensure that you only pay for stock that is delivered and is in good condition
- Pricing - a good pricing strategy is key to business performance but it’s one that a lot of businesses lack. You really need to know why you are setting a price and understand if your price is maximising the benefit out of all of the hard work of running your business. Most business base their pricing on how much their product costs. The most profitable however have moved to strategic pricing – pricing on their customers perception of value. Simple areas to consider are:
- adjust your prices so that they are in line with your competitors. This may seem obvious but you need to take time out to check what your competition is charging and that you are not too cheap
- price some of your stock lines to keep customers coming back. This will be those items of stock that are easy to compare with your competitors. This will keep customers dealing with you and you can then increase your margin on related products that may be a little harder to get
- make sure you price all stock consistently – don’t leave the same item on display with a different price. The customer will always choose the cheapest in this situation
For more information about this article, please contact your nearest RSM Office