04 Aug Are You Losing Money? 6 Ways to Immediately Boost Your Gross Margin & Profits
As a business owner, you’re constantly focused on managing costs for salaries, advertising, marketing, and other operating expenses. You’re striving for profitability and healthy cash flow to fuel your business’s growth. But have you recently taken a hard look at your gross margin? It’s a critical, yet often overlooked, indicator that can reveal if your company is inadvertently “throwing cash out the window”.
At Acumaxum, we specialize in helping privately held or family-owned businesses scale by strategically managing cash flow, profitability, and tax strategies. We understand that without a solid understanding of your company’s financials, making informed decisions and driving success can be a challenging task.
Understanding Your Gross Margin: The Key to Unlocking Hidden Profits
So, what exactly is gross margin? It’s the profit remaining after deducting the direct costs of making your product or providing your service from your sales.
Here’s how to calculate it: Monthly Sales – Cost of Goods Sold = Gross Margin
For example, if your sales last month were $100,000 and your cost of goods sold was $60,000, your gross margin would be $40,000. This $40,000 is what you then use to cover salaries, marketing, and other administrative expenses.
Why is this so important? Improving your gross margin is one of the quickest ways to add value directly to your bottom line. For every dollar you save on your cost of goods sold, that dollar directly contributes to your profit, increasing the profitability of your business and improving your cash flow. This freed-up cash can then be reinvested in other crucial areas, such as infrastructure.
6 Proven Strategies to Immediately Boost Your Gross Margin & Profits
Ready to stop losing money and start seeing more profit? Here are six actionable strategies to improve your gross margin and, consequently, your overall profitability:
#1. Reduce the Costs of Making Your Product
◦ Negotiate pricing with your suppliers. Explore options like early payment cash discounts, guaranteed pricing for the year, or annual rebates based on your purchasing volume. Don’t hesitate to check with other suppliers to ensure you’re getting the best possible deal and service.
#2. Turn Around Your Inventory Faster
◦ Your overhead expenses for sales, advertising, and administration are generally fixed for the month. By turning your inventory faster, you reduce these overhead costs on a per-item basis because your costs are spread over more products, lowering the percentage of overhead applied to each sale.
#3. Adjust Your Sales Mix
◦ Take a critical look at products or services that aren’t selling well or that have little to no profit margin, and consider eliminating them. Slow-moving products can lead to obsolete inventory, which directly lowers your gross margin. Focus your efforts on increasing production and sales of your more profitable items.
#4. Automate Your Manufacturing Processes
◦ Automation can offer several benefits: reducing payroll, producing a more consistent product, and increasing your inventory output. If your manufacturing process is labor-intensive, document the construction process to ensure consistency every time, which can also help reduce the number of defective products.
#5. Analyze Your Customers
◦ Not all industries and customers are equally profitable. Systematically analyze your customer base to identify and consider replacing low-margin customers with new, higher-margin ones. Critically, make sure you retain your high-margin customers, as they are key to achieving your sales goals and maintaining healthy margins.
#6. Negotiate Your Logistics and Warehousing Costs
◦ Review pricing from your freight carriers and aim to negotiate set rates. You can also reduce warehousing costs by eliminating or reducing obsolete and slow-moving inventory. If direct contract negotiation isn’t possible, ask if carriers offer programs or software that can reduce your rates.
Partner with Acumaxum to Maximize Your Profits
At Acumaxum, we don’t just provide advice; we help you create systems to put our recommendations into action. Our Outsourced CFO program is designed to help businesses like yours increase profitability by providing actionable recommendations and supporting you in creating Key Performance Indicators (KPIs) to track progress. We believe in clear communication and avoid technical jargon, explaining financial information in everyday language so you can make informed, confident decisions and remove the guesswork from your financial strategy.
If you’re ready to stop guessing and start proactively boosting your gross margin and profits, we’re here to help. We offer a complimentary strategy session to gain a deeper understanding of your business, challenges, and goals. Let us help you unlock your business’s full potential and steer it toward a more prosperous future.
Ready to gain a partner with top-tier financial expertise and insight to help your company get to the next level? Schedule your free strategy session today.