Do you ever feel like your company is throwing cash out the window? We are not talking pennies, but dollars. As business owners we are constantly focused on keeping our costs under control for salaries, advertising, marketing, and other operating expenses, but when is the last time you looked at your gross margin? Gross margin is the profit that will be used to pay salaries, marketing, and other administrative expenses. You can calculate your gross margin by taking your monthly sales and deducting your cost of goods sold for the month. Here is an example: say last month you sold $100,000 and your cost of goods sold was $60,000. Your gross margin would be $40,000.
Strategies to Improve Gross Margin – One the quickest ways to add value to your bottom line is to improve your gross margin. For every dollar that you can save on your cost of goods sold, that dollar drops directly to your bottom line. Improving gross margin raises the profitability of your business and improves cash flow. It frees up cash in the business to be used for other business-related investments such as infrastructure. Here are some strategies to improve your gross margin.
- Reduce the costs of making your product – Negotiate pricing with your suppliers. This could take the form of early payment cash discounts, guaranteed pricing for the year, or annual rebates based on purchasing volume. Make sure to check with other suppliers to make sure you are receiving their best deal and service.
- Turn around your inventory faster – The costs for your overhead expenses for sales, advertising, and administrative expenses tend to be fixed for the month. When you turn your inventory faster you lower these costs on a per inventory item basis. Your costs are spread over more products, reducing the percentage of overhead applied to each sale.
- Adjust your sales mix – Look at products that are not selling well or that have little or no profit margin and consider eliminating them. Slow moving products create obsolete inventory and lower your gross margin. Consider discontinuing slow movers and increasing production on more profitable items.
- Automate your manufacturing processes – Automation may allow you to reduce payroll, produce a more consistent product, and increase your inventory output. If your manufacturing process is labor intensive, consider documenting the construction process so it is completed the same way every time. Either method should also reduce defective products.
- Analyze your customers – Take a look at your customer base and consider systematically replacing low margin customers with new higher margin customers. Make sure to retain your high margin customers. Keeping the right customers is key to keeping your sales goals and margins.
- Negotiate your logistics and warehousing costs – Review the pricing from your freight carriers and negotiate set rates. Reduce warehousing costs by eliminating or reducing obsolete and slow moving inventory. If you cannot negotiate a contract, ask if they have programs to reduce your rates by using their software. This will benefit you both.