LEADING WAYS NEWSLETTER # 47

LEADING WAYS # 47
Restoring your Profit Margins

Speaker Tip of the Month
MEMORABLE PRESENTERS engage their audience.
One strategy for a Powerful Opening is to role-play with a member of the audience.
Review your next presentation.
Does it have a powerful, attention-grabbing opening?

Congratulations, you worked hard through the year-end slow-down, and now a worsening economy. Your actions have included ::

• A line-by-line review of all your operating expenses, and making necessary corrections.
• Establishing a month-by-month Cashflow plan, forecasting out eighteen months, and updating it monthly based on actual results.
• Committing to "face-time" with all your customers or clients --- showing that you are committed to their success, and in doing so looking for ways to expand the range of goods and services your provide to them.
• Targeting new customers to grow market share, or penetrate new industry segments.
• Providing Engaging leadership to your strongest team.

So, all that remains is that you focus on retaining or growing your Gross Profit margins.

To Refresh Your Memory

Gross profit ratio [GP ratio] is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales income.
The basic components of the calculation of gross profit ratio are gross profit and net sales.

Net sales means that sales minus sales returns. Gross profit is the difference between net sales and cost of goods sold.

Cost of Goods Sold is equal to opening stock plus purchases, minus closing stock plus all direct expenses relating to purchases.

In the case of manufacturer, it is equal to the sum of the cost of raw materials, wages, direct expenses and all manufacturing expenses. General office operating expenses [insurance, phones office personnel etc] are excluded from the calculation of cost of goods sold.

It goes without saying that a low profit margin indicates a low margin of safety: a higher risk that a decline in sales will erase profits, and result in a net loss more quickly than higher GP items.

Do you know what the GP benchmark is for your type of business, or type of product or service?

Many things have had the potential to erode your GP margins. These may have included ::

• Being too generous in the use of rebates in the case of high volume customers. Can you target rebates towards moving specific products?
• Carrying debtors too long. Remember, you are not their banker.
• Working capital finance charges, because of slow-pay debtors or inventory build up. [In my opinion these charges should not just be included as general overhead in that they do not give you a complete picture of the Cost of Goods Sold.]
• Assuming that customers are shopping around because of a tough market, and cutting prices without being asked to.
• On other occasions, being too aggressive in discounting when asked by a customer…for fear of losing them. Maybe the discount should have been more modest, or perhaps if you had a strong relationship you could test ahead of time what would have been appropriate and acceptable.
• Not being clear on the impact of exchange rate variations on specific customer orders.
• Being unaware of specific handling and shipping charges --- these should be related to specific products, and not just the general cost of say importing a container having a mix of products. Shipping to me is not an acceptable general overhead item. The more expenses you can move to "above the line" Cost of Goods Sold, the more likely you will be to trap higher GP margins. Your pricing rationale will then be easier to explain to customers.
• Over time, not watching margin trends by product line; customer or geographic region [shipping charge recoveries], and/or not understanding what the benchmark should be.
• Starting new customers off on an aggressive pricing structure, before they have established a trading and payment history with you.

Remember, if a customer comes to you on price, they will leave you just as quickly when they find a cheaper source.

Here are some tips in order to hold, or improve your GP margins::

• What are you doing to differentiate your product or service, in the mind of customers/clients? Do they simply view your product or service as a commodity, and not as something which adds value to their business success?

What does your business "stand for" in the minds of your customers? This is your perceived market position.

When did you last ask?

The link between "what you stand for" and the profitability of your products or services tells you whether or not you hold a differentiated market position.

• A renewed focus on the productivity of your people, and if not already doing so, introducing pay-for-performance.
• Managing down rework trends. Perhaps this may need to include retraining.
• Embarking on a plan to reduce waste by at least 10%. Again, perhaps retraining, preventative equipment maintenance or resetting machine tolerances.
• Time management – this may sound strange but when was the last time you assessed how you used your time? Delegating the routine or deferring other matters in order to focus on tasks which have the potential to deliver differentiated products with higher GP potential, thereby changing the sales mix. Customer "face" time is always important, but more so during a downturn.
• Relooking at your rebate scheme with a view of either raising the bar for new customers (grandfathering in the existing), or changing the quarterly or annual rebate based on high/low GP stock items.

• Relooking at your pricing model, and the price/volume price mix. Confirming pricing for those you view as commodities, and ensuring the best ROI for those differentiated products or services.
• Supply and demand review. Can I command more of a premium on short supply items?
• Can you bundle some products together and improve the GP in the bundle mix?
• What research are you doing to launch new differentiated products or services? When did you last release a MK II or MKIII of your products, with new customer benefits?

Notice I said "benefits" and not "features." It has to be of potential benefit to the customer in order to command higher GP margins, through the differentiation.

It’s time!

It’s time to Restore business disciplines; Reposition and differentiate your company and its products or services, and Renew – drive your business to the next level.
I know I have heard it over and over. "The economy is bad," "no-one is buying anything," "I’ve tried." Personally, I don’t accept those propositions.

Great leaders and business owners emerge in times of adversity. Anyone can look good and make money in the good times.

Case in Point:: Boats are a luxury item and many boat builders are going to the wall.
Not so for Will Otton and Hakes Marine. Looking at the world of sailing he learned of the battering the round-the-world [Portimao Global Ocean Race] boats received while crossing the Indian Ocean.

Will contacted the race organiser "We are here if you need us." Mowgli a British-based team then contacted him, and before he knew it all the others had also.
Temporary boat-builders were hired and they achieved a 100% boat repair turnaround, within the deadline of the next race leg starting.

So, what bushes are you looking under for your next opportunity?

Have a great week. As Abraham Maslow said, "You will either step forward into growth or you will step back into safety."

I say "No-one ever down-sized to greatness."

It is important to cut your cloth according to sales, but retain the strongest team.
However, ensure your moves are accompanied by open communication and a practical regrowth strategy to rebuild trust, and for your people to have confidence there is a real opportunity.

Kind regards
Denis Orme
027-472-8610
www.leader-success.com
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