Tuesday, June 14, 2011

Maximising Your Gross Profit - The Key to Business Success

One of the key challenges facing business today is how to maximise your profits.
In many cases, this means growing sales as quickly as possible, sometimes by sacrificing price to build volume.
This can be a major flaw in many business models. In fact, we'll look at the impact of discounting on profitability in a later blog.
The main thing to consider here is that profitability comes from maximising your gross profit, not necessarily sales.
So, what is gross profit? Simply put, it is your selling price (net of GST/VAT) less your cost price (net of GST/VAT). And your gross profit margin is your gross profit divided by your sales (net of GST/VAT).
For example (all figures net of GST/VAT)
Sales                 $100
Less Cost             60
Gross Profit         40
Gross Profit Margin = $40/100 = 40%

Your aim should be to maximise your gross profit margin. However, there will be a point where maximising gross profit dollars is more important than gross profit margin. For example, if you have a chance to sell $100000 of product at a 5% gross profit margin, with very little effort, then may be you should take it, even if your normal gross profit margin is 50%. Particularly if your average sale is relatively low. So, say your average sale is $100 and you have a gross profit margin of 50%, you will make $50 on the sale. The 5% gross profit margin on the $100000 sale equals $5000 or 100 normal sales at your 50% gross profit margin!
So, you need to consider your gross profit margin % position as well as gross profit $. In reality you pay your bills with $, not %!
What will you do to max. your gross profit position??

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