The long and short of it is that a company can only plump up its profit margin in one of two main ways. First, it can either focus on increasing the money coming in through the tills, or it can look at whittling away its cost base.
In this article we’ll look at some of the ways in which a firm can improve its profit margins:
Cost Reduction – For companies operating within tight or recessionary markets, it can often be hard to raise market share or prices – which makes it all the more crucial to focus on cost reduction.
- Are you negotiating the best possible deal? Suppliers and trends change over the years. Make sure your purchasing department is getting the best possible bang for its buck, for all the costs related to your business. Whether it’s stock or office, stationary and print – get on the phone and barter a better deal for the firm.
- Use volume discounts to full capacity. If you’re turning stock over efficiently and re-ordering too often, consider increasing your volume of purchase to secure bigger discounts. This is certainly a good cost scalping measure, but it relies on the company having sufficient working capital to facilitate bigger purchases. In addition, make sure you really can turn the stock over in good time, especially if the stock you order is prone to spoiling.
- Identify bottleneck & process improvements. Most companies, especially as they age and grow, develop unfortunate bottlenecks. This can be due to a host of reasons, from aged and inefficient technology to sluggish operational processes that cost both money and time. Identifying and slaying these bottlenecks is a good way of reducing cost while improving your profit margins.
Other ways to improve gross profit margin:
- Get your pricing right. Are all your products and services being offered at price points that will maximize profit margins? Pricing is a somewhat dicey business aspect to get right, as it involves a little guesswork and trial/error. There are many guidelines to aim your prices right at your target customers sweet spot – factors to consider will be comparable competitor prices, your own cost base and margin expectations and your ultimate brand goals.
- Call in your debts. Debt control is a key and somewhat underestimated business requirement. If you have tons of unpaid invoices on your books, these will ultimately eat into your profits if they transcend from the balance sheet and end up on the bad debts area of your financial statements. Good debt management will involve taking on only credit worthy new customers, and following up routinely on unpaid invoices.
- Control your working capital tightly. If your finances have a wobble and you end up having to finance loans for short term working capital purposes, it can end up being rather expensive. Short term loans are never cheap, and then there’ the hassle of getting your local bank to give the nod on a new loan. Instead, keep a very close watch on your working capital levels, and take quick action if you see cashflow turning negative.