Gross profit and gross margin are two key numbers in every business. They are also…
Why Drilling Into the Details Will Make You More Profit
I first met Karen when she had been in business 18 months. The business had a good income but she wasn’t making any profit and she wasn’t drawing any salary. She told me at that time that she didn’t have a clue about the financial aspects of her business and her business coach had recommended that she seek professional advice to help her understand the numbers.
Karen was not unlike most people when they start out in business, she had a vague idea about what a profit and loss statement meant, but got really confused when looking at the balance sheet report. She also didn’t really understand what her cost of sales were and whether she was selling for the right price.
The first lesson that Karen learnt was what to include in her cost of sales and what gross profit and gross margin really meant. Karen is a florist and had previously considered that her cost of sales was the cost of flowers. What she hadn’t included in the calculation was the costs of packaging, delivery, cards and tags, and also the cost of wages of her team who put the bunches of flowers together.
Once we had changed the system so that these other costs were included in the cost of sales in the reports, the next step we took was to drill down into the details. Karen had a record of how many bunches she was selling each day, week and month. We took that information and identified the cost per bunch for each cost in the cost of sales. This gave her a starting point.
Karen looked at the starting point numbers and considered each cost and what she could do to reduce the cost per bunch. For example, she identified that she would be able to reduce the delivery costs by re-negotiating the delivery fee she was being charged. She felt that she had enough history of consistent business to be able to ask for a better rate from her current delivery company. She also felt that she could probably get a better deal from an alternative delivery company if she couldn’t get a better rate from her existing supplier.
Cost by cost, Karen considered what she could do to improve the numbers and made the changes. One of her major costs was wages. She had a mix of experience in her team and they each worked at different paces. Her experienced staff member churned out a large number of bunches, whilst some of the others were much slower. Through implementing systems and processes, establishing targets and productivity expectations, Karen was able to improve the efficiency of all the team members and reduce the cost per bunch.
By drilling down into the detail of the numbers, Karen increased her gross margin by 29% over a period of 9 months. During this time, she was also actively marketing and promoting the business and increased her turnover by 40% with no increase in pricing. The combination of these two numbers meant that her gross profit had increased by 81%.
Karen was running a fairly lean business as far as her overhead expenses were concerned and hadn’t fallen into the trap that many business owners do of paying for costs that aren’t necessary for the business. This meant that there wasn’t any scope for reducing her overhead expenses. What Karen was wanting was to pay herself a salary. Due to the significant increase in her gross profit, Karen was able to start taking a reasonable salary 5 months into the process and after 9 months she increased it by 20%.
Karen has built her confidence with the numbers and she now says that she has a much better understanding of how the business works and what impact her decisions will make on her gross margin and profit results. She’s now able to concentrate on growing the business whilst still keeping an eye on the numbers.
Drilling down into the detail of the numbers of your business will help you to understand your business better, give you peace of mind, and provide you with the knowledge you need to grow your business and make informed decisions.
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