Multi-Unit Franchisee Magazine Issue II, 2016 | Page 104
Finance BY ROD BRISTOL
Growing Gross Margin
Small steps taken over time boost profits
D
o you know the seven drivers of gross margin? More
important, do you know how
to actually manage them in
your business? Let’s look at each one in
turn—and they are remarkably similar in
virtually any kind of operation.
1. Not taking cash discounts on
payables. “2%/Net 10.” It doesn’t seem
like a lot, does it? However, if you have
the cash available, not taking discounts
will affect your gross margin. Two full
percentage points off your cost of goods
sold items can have a significant “add up”
effect if you are consistent with this on
a long-term basis. If you don’t have the
cash available, you need to address other
issues in your operational processes to
generate the cash to enable you to take
those discounts, and to participate in other
opportunities as they come along. Cash
is still king, and as the economy continues to be of concern cash accumulation
is highly advised.
2. Low productivity. Every operation
can improve how they do what they do.
No exceptions. It doesn’t matter if you are
operating at the highest labor efficiency
in your network, there is always room
for improvement. One way to achieve
this is to get everyone within your labor
line item on board with driving up your
production or service efficiencies. People
enjoy competition, and creating new ways
for staff to engage in friendly competition
usually results in labor savings that drop
straight to gross margin.
3. Poor inventory control. The only
thing that sucks up cash faster than poorly
managed receivables is poorly managed
inventory. Excess inventory directly affects gross margin. This also can be true
in a service-based business where your
“inventory” is the number of hours you
are buying every day. How you deploy
those hours is critically important if you
want to maximize your gross margin. Your
most expensive people should be working on your highest revenue-producing
projects, and your least expensive people
should be delivering results on your lower
revenue-producing activities. As it turns
out, exactly the opposite is often true—
and no one is paying attention.
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4. Shrinkage. I often tell the story
about the hotel I stayed in that actually
posted on the bathroom mirror the price
you would be charged if you wanted to
“buy” various items from the room. Actually, there were a number of great deals:
the sheets were cheaper than at Costco!
So who steals in a business? At any given
time almost anyone can be tempted. Managing that temptation by careful inventory
and stock controls is critically important
in maintaining a culture of accountability
and honesty.
Careful inventory
and stock control is
critically important
in maintaining
a culture of
accountability
and honesty.
5. Bookkeeping errors. Where do
you first learn that something is wrong in
your business? Is it in your head? Usually
not. You usually feel it first in your gut.
When you get that feeling, don’t ignore
it because you are probably right. Bookkeeping errors can come in the form of
theft or incompetency that can lead to
jail, divorce, or even an early grave. We
have an excellent checklist I’m happy to
make available if you feel there is something wrong in the accounting activities
in your business. Just shoot me a quick
email and I’m happy to send it along.
6. Poor pricing. We teach a wonderful tool called “break-even” that enables a
business owner to “measure the paranoia”
of a price increase. When you rea lize how
much less you can sell and still make the
same amount of money if you raise your
price, this knowledge is truly empowering—and has enabled many business
networks to improve gross margin as a
result of careful, consistent price increases.
7. Poor buying. It is easy to get lazy
and not react quickly when our costs increase, and they always do. When I owned
my printing company I often consulted
with other owners around the country
who hadn’t bothered to look at their paper
invoices, only to discover later that over
a 12-month period they had a 4 percent
increase in their costs. Not paying attention costs gross margin. All business
owners are busy, but another mistake is
to not take the time to check that your
trusted vendors aren’t gouging you as you
extend your long-term relationships with
them. An excellent exercise is to strive for
a 2 percent decrease in all of your cost of
goods sold items annually. It takes work
and commitment, but once again that 2
percent drops directly to your gross margin.
Finally, one of the most important elements of Profit Mastery is the concept
that gross margin is not usually affected
by a large (5 to 10 percent) change in
your costs or a dramatic increase in sales.
Improving those numbers is a result of
management, taking care of business every
day, and making a small (1.5–2 percent)
improvement in many line items—which
ultimately drives up gross margin.
Rod Bristol is executive
vice president at Profit Mastery. Learn more at www.
profitmastery.net, 800-4883520 x14 or write to bristol@
profitmastery.net.
MULTI-UNIT FRANCHISEE IS S UE II, 2016
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