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How to Improved Profit Margin

The fastest way to grow your profits is often to improve your margins. Many businesses don’t like to talk about margins because they feel increasing margins requires cutting quality, but that simply isn’t the case. There are a number of steps you can take to improve your margins without sacrificing quality or service.

  1. Know Every Number

Above anything else, you need to know every single number that’s involved in your business. Your bookkeeping services should provide detailed reports breaking down each individual cost along with combined reports of related costs.

For example, a restaurant should know the cost of every single ingredient in every dish. If you only know your total sales and food costs, you might not realize specific dishes are actually costing you money. If you don’t know the cost of a slice of cheese on a cheeseburger, you may not realize that using an expensive cheese is harming your margins without adding any perceived quality to your burgers. 

  1. Manage Your Inventory

Even when you think your costs are under control, poor inventory management could be raising your expenses. You should be able to ask your accounting services exactly what you have on hand and where it is at any time.

If you manufacture products by hand and a worker can’t find a part, they might ask the manager to reorder it. By the time someone realizes you have more buried in the back of your warehouse, you may no longer use that part and now have wasted inventory.

With strong inventory controls, your purchasing manager will see there’s more of the part somewhere in your warehouse before placing another order.

  1. Always Negotiate

Everything is negotiable. While your suppliers want to protect their own margins, they also want to keep your business.

At least once a year, call your suppliers and ask for a better rate. If they say no, see if they’ll do it if you offer a guaranteed minimum purchase, extended delivery time or an agreement to do business with them for a longer period of time.

While these types of offers might increase your risk, you can mitigate the risk with strong sales forecasting to see if you can actually use the increased supply.

  1. Increase Speed

Working smarter is often better than working harder. Delays at any point of your manufacturing and sales process can increase your costs.

If your inventory moves slowly, you have increased storage costs, greater risk of spoilage and the possibility of unsold items no longer being in demand. If your workers are slowed down by not having the right tools, buying new equipment to help them work faster can boost productivity and reduce labor costs.

  1. Cut Choices

Consumers say they value choice, but choices cost you money. Each additional product or service requires more employee training, more inventory and more risk of not selling.

Look for overlapping choices that won’t affect your business. For example, a hardware store selling hammers with black or gray handles probably won’t see any customers walking out without buying a hammer if they stop selling one of those colors.

Use your accounting reports to figure out which items have the highest margins, which items sell together and which items are purchased as replacements when another item is out of stock.