“Until you have detailed information on the many elements that make up your gross profit, you will be a hostage of your business. Once you understand your gross profit margin you can start driving your business”

There are three ways you can grow your gross profit:

  • Increase sales prices

  • Reduce variable direct costs

  • Increase volume with the same fixed direct costs

Well I am hearing a few “no shit Sherlock” comments after this great revelation. I apologise for stating the obvious but it is the simple truth. While these goals seem very simplistic, the varied strategies that are available to any business to achieve these goals are many, and can range from difficult to near impossible. Nevertheless, there are real achievements that can be gained.

The reality is that many SME businesses just do not have enough information on the true cost (and therefore margin) of many of the products and services that they sell. Often this lack of information is incorrectly justified by being outside of the control of management.  Comments such as “The market sets the price” are often rolled out.

It might be true in many cases that “the market sets the price” but you decide what you are going to supply, who you are going to supply it to and how you go about supplying it. The market does not care whether you make a profit or not”.

Margin improvement is rarely about major changes. Margins need to be understood across various products, categories, customers, channels, regions and other relevant sections. Once this is achieved, strategies can be put in place to improve the overall margin. Strategies can include: focusing on selling the higher margin lines, additional marketing support to the more profitable customers, cost reduction initiatives, utilising spare capacity to reduce costs, and many more.

For those many businesses who do not have the resources or skills to achieve this analysis they should speak to an appropriately experienced consultant who can provide this level of support. The members of the Association of Virtual CFOs is a great place to start if you wish to speak to someone about gaining control of your gross profit margins.