Multi-Unit Franchisee Magazine Issue II, 2012 | Page 72

Finance
By Steve LeFever

10 Ways to Boost Profits
When raising prices isn’t an option

M

any of us have done as
much cost cutting as possible. (Does the phrase “to
the bone” ring a bell?) But
based on the evidence we’re seeing from
around the country in many different types
of industries, we believe that opportunities to build profits remain. And profits are
more important than ever for your company’s day-to-day survival and long-term
health, and for laying the foundation for
a successful ownership transition.
While many factors affect profitability,
we’re going to focus on gross profit—that
is, what’s left after you subtract from your
sales the costs of selling your product (called
cost of goods sold) or delivering your service (cost of sales). While it is critical to
keep an eye on all costs, in almost every
business model the largest percentage of
costs is tied up in the company’s cost of
goods sold. Because of this, even small
changes in margin can have huge impacts.
Let’s say your sales are $1 million and
your gross profit is $340,000. Stated as a
percentage, you have a gross margin of
34 percent, which means that after you’ve
paid for the goods you sold, 34 cents out
of every dollar you made in sales is “left
over” to cover all of your other operating
expenses. However, your industry peers’
gross margin is 35 percent. That 1 percent
difference might not seem like a lot, until
you realize that if you had achieved that
same 35 percent margin in your company,
your gross profit would have been $350,000.
That’s $10,000 more that could have gone
straight to your bottom line, assuming none
of your other operating costs changed.
Here’s my top 10 list for increasing
profit and company value when there’s
downward pressure on prices.
1. Set a gross profit goal. Measure
it properly. Watch it like crazy. Start by
ensuring that your accounting system is
categorizing the right costs in this area.
You’ll need the ability to compare your
company to others in your industry, and
to do so you must compare apples to apples. Be sure your cost of goods categories match those of your industry peers.
Industry benchmark studies, sometimes
available from your trade association

70

Multi-Unit Franchisee Is s ue II, 2012

or The Risk Management Association
(RMA), can provide comparative data so
you can learn what type of gross margins
the profit leaders in your industry achieve
and set appropriate gross margin goals. Get
profit and loss statements with columns
that show your numbers in both dollars
and percentages. That way you can see
changes in gross profit in absolute terms,
not just changes caused by sales increases
or decreases. You should track your gross
margin on at least a monthly, if not weekly,
basis so you can take quick action.
2. Tune up your product mix. Once
you have your costs in the right buckets,
you have the “high level” view of gross
profits—your company’s overall gross
profit, which consists of the gross profit
of each of the items you sold. This, in
turn, adds up to the total gross profit
of each of your product lines. This adds
up to the gross profit in area, or department, of products or services. While you
can measure your historical gross profit
this way, ultimately the only way to really
manage it going forward is to drill down
backwards:
Total gross margin
Gross margin by department
Gross margin by product (or service) line
Gross margin of each SKU (or stock
unit) or job
Breaking down your gross margins
in this way can help you identify which
aspects of your business are helping you
meet your goals and which might be getting in the way.
I once coached a jeweler who was
a member of an industry performance
group. He was distressed about his low
gross margin percentage as compa ɕ