If you want to make more money then look at the profit margins your business makes – and change them upwards.
Your margin is the gross profit you make on every sale.
If you sell a teapot for £15 and it costs you £8 to buy then the gross profit is £7 and the margin is 7/15 x 100% = 47%.
But if you sell the teapot for £16 and you buy it for £6 then your gross profit is £10 and the margin is 10/16 x 100% = 62.5%
Every teapot you sell now makes you £10 instead of £7 so with every sale you make more money. Which is a massive part of why you’re in business.
Profit Margins – a case study
These are the year-on-year results of a business I work with. As you can see, sales are down but their gross profit is up – they have made more money from fewer sales!
|This year||Last year||Change|
|Cost of sales||375||545||170|
They have tasked their sales team not just with making sales but with making sales at higher gross profit margins. This is reflected in the commission plan for each of the sales team – they earn substantially more commission on every sale they make above a hurdle level of gross profit.
It has taken some time to bed this approach into the business but it’s now working and the success of the change is being felt all the way to the bottom line and on into the bank!
If they repeat last year’s sales at this year’s margin then their gross profit will increase from £525k to £642k – an increase in excess of £100k!
How can I increase my profit margin?
As with the teapot example, there are only two variables – sales and costs of sales. You need to look at both and not be afraid to change either.
You don’t need to make wholesale changes – why not increase prices in a selection of products or services and see what happens. Once you have tested some increased prices and have a good idea of what works and what doesn’t then roll out what works across your business.
It doesn’t matter if you lose some revenue provided the increased gross profit more than compensates. As the example above demonstrates – less can be more!
On the supply side, it’s a competitive world. Are you getting the best price from your suppliers and do you know who else you could buy from if you’re not? Review what you’re buying and how much you’re paying and keep your suppliers on their toes.
Finally, you need to measure gross profit accurately and keep your eye on it. One way of doing this is to make it someone’s job to be the Gross profit officer.
Increasing your profit margin – the amount of money your business makes on each sale – results in higher profits and improved cashflow. It’s so beneficial and simple to put in to practice – why not start making your changes today?
Sales | Margins | Profit | Cashflow