Sales or business development is the backbone of any business. Without sales, any business won’t have the capacity to operate, hire people or buy equipment.
If your business can’t make profits that match your expenses there may not be a future for your business. Most people think cutting fixed expenses can help. Sure, it will, but for how long will you do that before it affects revenue generation which eventually affects your business’ ability to achieve the gross profit you are aiming for.
When it comes to profit and loss, the total profit rules. Thus, what you can get in terms of operating profit can easily be calculated.
Businesses are becoming more and more competitive each day and the trend isn’t set to stop but will continue to increase. As such, there is pressure for businesses to work on their gross margin.
Besides hiring the best business accountants, there are a number of things that you can consider doing that can enable your business to achieve the set targets on your gross profit margin.
Knowing how important it is for your business to maximize on its potential, this article is divided into two sections that look at how your business’ materials and labor affects your overall gross profit margin.
It can be a little bit wordy at times, but stick with it.
Below are the key points that you need to consider:
- Failure to pass the cost of materials
It’s not uncommon for your local or international supplier to increase the cost of the material you purchase from them. These can be due to the increased cost of acquiring the products from their end, increased manufacturing costs charged on them or revised laws. To ensure these costs don’t put your business at a disadvantage, it’s important to pass these costs onto your clients. Of course, this can be tricky. Research and find ways of how you can go about increasing the price of the services you offer. On the other hand, you can find a new supplier who can provide you the same quality products at a lower price.
- Mix of products
For the business to succeed, you’ll need to review your financial statements on a monthly basis. This will give you insights into how your business is performing and if you are able to meet your gross profit margin for that month. This review will enable you to see the shift in the gross margin which you can compare month to month. This is usually caused by mixing the products or services your business has sold in any given month. Find the products whose sales don’t impact heavily on the gross profit margins and either upsell them or stick to the ones that will give you the required gross margin and push for their sales.
- Material theft
There is nothing more annoying as discovering that your trusted employee (s) has been stealing from you. This depends on what products and services you offer and how much your employee stands to gain from it. Nevertheless, there are measures that you can put in place to curb this. Ensure that you do a background check on your employees, install CCTV cameras in your business and develop a company culture that is understood and adhered to by all employees.
- Failure to have goods paid for delivered
This is a common occurrence with most businesses. If there are no proper systems to check and validate the goods that have been delivered, as a business, you’ll end up paying your suppliers to deliver goods that will never be delivered. This is one of the quick ways businesses lose money. A quick fix is ensuring that there’s someone accountable for incoming goods and that they are manually checked and the right invoice signed for all materials delivered.
- Failure to allocate materials used
Most businesses are able to project the required number of materials it will take to complete a job. However, at times one may need extra materials to complete the job. In most cases, these extra materials are never made known. Another cause could be lack of having the materials listed in the initial quote. This, however, can easily be resolved. Putting in place proper systems or personnel that oversee stock inventory can help. Also, recruiting qualified and experienced staff and having training and mentoring sessions for your employees will help a great deal.
- Wastage of materials
Several reasons could cause why your business might be prone to wastage of materials. It could be that they have expired, are damaged or are outdated. These, of course, mean that you won’t be able to use or sell such commodities. Another reason for this would be poor processes when manufacturing the said products. Ensure that your business has state of the art warehouse storage systems to extend the lifespan of your product and buy products that have a lengthy expiry date.
- Errors in stock take
When your business’ record keeping is faulty, there are bound to be errors that will affect the business greatly. In the event that the sales transactions are overstated so will the gross profits and vice versa. The end result is that the financial statements will be affected and your accountants will not be able to analyze and give advice on what strategies to use to improve your business. Therefore, there is the need to train your staff on the right way of stock management and inventory control to reduce this risk.
- Lack of accounting for progress claims or work that’s in progress
Every job that’s complete or is still being worked on needs to be accounted for including the deposits received from customers. This is the only sure way you end up with financial reports that paint a true picture of the ability to achieve the gross profit margin. Rule of thumb is to match the income and expenses acquired over a given period of time. The two approaches to assist: calculating the work that’s still in progress and having it removed from the profit and loss until the job gets done or leaving it and adding up the income expected from the job. For any business, this process needs to consider the impact of the progress claims and the deposits so as to log income at the right time.
- Cost of labor for work in progress
Calculating work in progress can be a bit challenging. While it’s easy to do the math on material cost for work in progress, it can be hard quantifying the labor cost. The common way of calculating labor cost is adding the base rate, allowances, superannuation, overtime pay, payroll tax and work cover.
- Repeat work and warranty levels
Due to lack of proper training or hiring unqualified professionals, your business might be forced to keep repeating one job several times. This of course impacts heavily on the cost of labor that could otherwise be used in other projects that could generate revenue. Your business can curb this by recruiting qualified professionals and offering them the right training. On warranty, you can have the conversations with your supplier and review the quality of products being offered.
- Errors in bookkeeping
Editing data that’s already been logged into the accounting system (Xero, MYOB etc) can be hard. Moreover, the wrong data on your accounting books can cost you money for wrong filings. When hiring, ensure you get a qualified and well-experienced bookkeeper that’s conversant with their work and that every month your accountant looks through your business’ accounting files.
In as much as we wish that our employees are trustworthy individuals, not all have the business interest at heart. There are various ways fraud can be carried out in your business;
- having the wrong person receive payments made for your business.
- Someone who creates a false invoice and submits it for payment and then interferes with the payment system so as to get approval and payment for the fake invoice.
As with all the other issues, you can put in place systems that are hard to manipulate for your employees’ selfish gains. Hiring an accounting firm to come in and conduct an audit of your controls can greatly assist.
- Selling your products cheaply
The number one reason for this is when businesses feel that they need to offer low process on their services so as to get large volumes of work. Additionally, sending the wrong quotation for your services and having the wrong costs on materials and labor can greatly impact your business’ gross profit margin. It’s okay for businesses to offer low pricing when trying to clear stocks or for a given period of time. However, prolonging this would mean your business is spending more than it’s making which can negatively impact on your profits. Ensure the right quotations are always sent out that factor in the labor and material costs and that your sales reps aren’t offering discounts they have chosen themselves.
- Employee productivity
If you have unskilled employees, this means more time on the job at the expense of your business. Your employee’s input needs to match the amount of output they do. Easily distracted employees who get too much overtime can also affect your business. Develop measures that will ensure that your employees are getting the job done within the given time frame. Again, providing on-the job training or hiring skilled employees can help you minimize the risk of employee productivity.
- Charging low labor rates
Whatever your labour rates are, you need to ensure that they are accounted for accurately. This can be done by reviewing the costs incurred such as payroll tax, work cover, allowances, overtime, etc. on a regular basis.
Your business dynamics can change frequently. It’s important your business is up-to-date and abides by the set laws and regulations if you want to maximize your profits. Innovation and change is the only way that your business can survive all this. As you plan your business always ask yourself, “What changes will influence the prosperity and sustainability of my business five or ten years’ down the line”.