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WHAT’S ERODING YOUR PROFIT MARGINS?

By Frances McGuckin

It’s that dreaded time of the year again when you are faced with having to find time to think about accounting and taxes. If you are making healthy gross and net margins and have all this stuff under control, then skip this page. If you don’t, then take some time out to do so.

It’s too easy to get caught up in day-to-day operations and not look at the factors affecting the bottom line. “Things” happen and important “things” get overlooked. For example, at a recent workshop on financial control, when I posed the question “What factors could affect your gross margins?”, you could have heard a pin drop. No one was confident enough in their knowledge to speak up. After a little prodding, some of the dealers’ responses included “too many unpaid accounts” and “too much inventory.” Both answers are wrong.

Low gross margin, low net profit
To ensure healthy gross margins – which pay the overhead and your wages – you must truly understand what factors affect them. Here is a list of some of the more common factors that munch into gross margins:

  • Low prices to attract customers
  • Not increasing prices when equipment costs increase
  • Freight, duty and brokerage increases
  • Offering too many specials or discounts
  • Too much outdated and slow-moving inventory
  • Not increasing prices because of competition
  • Samples being used and not recorded
  • Personal items taken from inventory not recorded
  • Theft.

Those who make the mistake of not watching their cost of sales and performing some regular, simple price and profit checks may get some nasty surprises at year-end when their financial figures are completed. There is often no easy solution to increasing profit margins. If you started in a highly competitive business or if more competitors moved into town, you have your work cut out for you. Using effective marketing techniques to improve sales and exposure is necessary, as is recalculating costings when raw material or other costs increase.

Profitable pricing and astute inventory control are key factors in maintaining gross margins. One dealer told me that he finally took the time to organize his parts inventory, only to be astounded at the amount of unusable stock was sitting on the shelves. These parts had to be written off for the year-end. They were an accumulation of years of collecting, yet the profit reduction had to be reflected in the current year, which lead to miserable net margins and financial statements.

Another dealer who works with wells and pumps finally cleared out his inventory after some consistent nagging. What showed as $150,000 on the books was finally reduced to $55,000. The rest was junk. No business can afford that kind of fiscal loss.

Small but significant
It’s the small, day-to-day bad habits that can erode your inventory control. One dealer mentioned that staff and teachers were always taking odds and ends off the shelves for displays or classes, without the product being recorded as an expense. Perhaps you grab the odd bobbin of cotton or small accessory to take home or as a gift for a friend without recording it as personal usage. You may also have theft happening that you are not aware of.

Is your overhead under control?
As competition increases and technology changes, overhead becomes even more difficult to control. We used to manage with just telephones; now we need faxes, voice-mail, extra phone services, e-mail, pagers, cell phones, Internet service providers, Web pages and hosting, to name a few. Time and money are spent on and replying to these communications, learning new programs and upgrading or fixing computer equipment.

Marketing efforts have to be stepped up to stay competitive and equipment knowledge upgraded. No wonder people have difficulty coping. Often, overhead costs are hastily incurred without first calculating whether the business can sustain the extra cost.

When business is slow, having a panic attack and spending fruitless dollars on a huge advertising campaign is not the answer. Spending $2,000 on advertising at a 50 percent gross margin means that $4,000 in sales must be generated to cover this cost. How can you improve? Sometimes you just need a gentle reminder to stop and take a long, hard look at your business.

Meet with your accountant
If you haven’t made a habit of perusing your financial figures, why don’t you start now? Sit down with your accountant to review your current costs with a fine tooth comb, particularly those which you have control over. You can’t control rent, but you can control marketing, office and telephone costs. See where you are being frivolous and trim, but don’t trim those that will have a detrimental effect on your business.

Most people think of their accountant rather like they think of their dentist – a necessary evil. Change your philosophy. Your accountant is there to help you succeed. Spend time with them regularly – not just at tax time. They could become your business’ best friend.

Frances McGuckin is a professional speaker, trainer, consultant and author of Business for Beginners and Big Ideas for Growing Your Small Business. She can be reached at 1-888-771-2771, e-mail at contact@smallbizpro.com.

This column is available for syndication. For information, contact Frances McGuckin at contact@smallbizpro.com.

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