5. Profit Margins

Profit Margin is the percentage of each sale that you get to keep after you have paid the necessary expenses to provide your goods or services. You have 2 profit margins: Your gross profit margin is the % you have left after cost of goods and/or cost of labor are paid (such as the labor for your technician). Net profit margin is the % that is left after you’ve also paid all of your operating costs (such as the rent, electric bill, administrative employees, etc.) In simplest terms, if a business sells something for $100, and gross profit was $25, the gross profit margin is 25%.

With our goal being to improve your profit margin by a moderate amount, say 10%, some changes need to be made to do that. Here are some ideas to consider:

  • Increase your prices
  • Advertise/sell more goods or services that already have higher profit margins built in
  • Keep an accurate database – inaccuracies waste time and advertising money
  • Add a commission-only sales person/team
  • Provide sales training and encourage sales of higher margin goods/services
  • Reduce/get rid of overtime for production employees – switch to shifts if necessary
  • Reduce team size – unless you are maxing out the service hours for every service (production) employee, consider reducing your production staff.
  • Reduce unnecessary management – give your best people the power to make decisions instead
  • Outsource/hire temporary help for seasonal rushes
  • Improve efficiency, productivity and time management – rearrange your layout to reduce how much traveling employees need to make to get work done and properly schedule their days to accomplish more.
  • Create team incentives based on margins
  • Reduce duplication – of both effort and materials
  • Know your actual costs – review your KPIs regularly. Calculate your labor expenses to include not just hourly wages but FICA/MED, unemployment tax, workers’s compensation, and benefits. Make decisions based on these facts
  • Set monthly expenditure budgets and stick to them
  • Require authorized purchase order numbers for accountability
  • Negotiate better pricing from suppliers
  • Review all monthly bills (telephone, internet, trash pickup, electricity, rent, insurances, IT services, etc.) and negotiate with service providers for better rates/find new providers
  • Review insurance policies to see what you do/do not need
  • Put lights and HVAC systems on timers
  • Recycle as much as possible
  • Decrease travel range – travel expenses eat away at margin
  • Stock on consignment – many vendors offer this option
  • Reduce in-stock inventory and find right-on-time delivery vendors
  • Only stock fast moving stock
  • Buy direct and/or in bulk stock that sells quickly
  • Work from a home office – if your services are on-site only or you sell goods primarily through the internet this is a great way to reduce overhead expenses significantly
  • Join/start a buying group to reduce costs of goods
  • Re-finance business loans at a lower rate/lower payment
  • Change A/R account payment terms (example: 30 day terms to 7 days)
  • Invest in technology – if you are wasting work hours dealing with slow/old computers, lost emails, bad connections, crashing servers, etc., it is time to upgrade to increase both efficiency and productivity
  • Systematize the routines, humanize the exceptions
  • Automate as much as possible
  • Sell obsolete equipment/machinery
  • Only buy what you NEED and BE TOUGH on the definition of NEED!
  • Use a company credit card for bonus points and up to 55 days interest free
  • Change accountants – you might be surprised how much a great CPA can save you
  • Stop running ads that don’t work – measure ROI on everything by asking prospects and clients where they heard about you
  • Collections – don’t carry a huge A/R balance.

In my opinion, the best options reduce expenses. However, as we’ve discussed in prior articles, if you are the “cheapest guy in town,” a price increase is probably a good idea as well to improve your margins.

Enjoyed this series? Let me know! Charlene@seamlesscoach.com


About seamlesscoach

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