Business owners often focus on sales, when looking to grow their business, but maximising your profit margin is the most effective way to squeeze the most from your business.
It’s a particularly useful to hone in on during tough economic times when sales can be harder to generate.
Two key profit margins to break down are your gross profit margin and your operating profit margin.
Both give you a rough guide to the profitability of your business, yielding percentages that can be compared to benchmarks for your industry.
The ATO’s benchmarking tool is a useful guide.
Gross profit margin
This is the proportion of revenue you have left after deducting the cost of producing or buying goods. For example, if you make a bike that sells for $400 and the cost of all the parts to build it is $100, your gross profit margin is 75 per cent.
Operating profit margin
This is calculated by taking the gross profit margin, then deducting indirect costs or “overheads” involved in production and delivery, such as wages, advertising, freight, warehousing and office rental.
Breaking down your profit margins across various departments and customer bases can help highlight two key issues: what are your most profitable lines/customers and what costs are eroding your profit margins.
Some tips to maximise your margins:
- Cut low margins: Cut products and services that don’t deliver good margins and focus your resources on selling those that do. It’s not worth your time slogging it out for low margins.
- Time is money: The longer the lag between order and delivery, the more overheads eat into your operating profit. Look at how you can streamline processes to speed up any part of the process utilising new technology, automation or better training for staff.
- Upsell: Look for opportunities to maximise each sale with “add ons”. If you are a service-based company, consider selling products that complement your services. For example, a physiotherapist could also offer trigger point massage balls or rollers. If your business is product-based, you may offer services, such as training to use products you sell.
- Look for waste: Examine industry benchmarks to see if there are any areas you seem to be underperforming and look for areas in which your costs seem too high — rent, utilities or staff.
- Niche: Do you have an opportunity to niche your business? Instead of trying to be everything to everyone, it can be more profitable to target a key market. Finding a niche for your business is the key to growth in tough times. People are looking for specialists and they are willing to pay more for that expertise or hard-to-find product or service.
- Target the money: Incorporate premium products or services. They’re not for everyone, but they generate the biggest margins.
