Profit margin can be increased by at least 5% with the assistance of a Virtual CFO – here is an example of how we’ve helped a past client, not solely consultancy but hands on delivery.
Case Study
At £5 per £100 5% does not sound much however a £3 million saving per £60 million of sales and this starts looking worthwhile! Even better, whilst some of the improvements listed below helped me achieve this increase, in businesses where these have been completely overlooked the savings could be much more significant!
Gross profit margin is the profit percentage of sales less direct costs of manufacture, for example materials and the wages of the production team. Some organisations, where it can be attributed directly to production or distribution also include the manufacturing element of utilities and motor vehicle costs.
I achieved this success whilst working as an international virtual CFO for fine food distributor Classic Fine Foods then trading in a dozen Asian countries. The Group sales at the time was £60m and my annual savings amounted to £3m.
As a distributor to a crowded market often with exclusive selling agreements for many of the products there was little manoeuvrability on sales price so any improvements had to be achieved from cost, process efficiency or sales volume.
Savings achieved
- Using a report written from the accounting system – profitability analysis of every transaction by both product and customer was produced. This identified poorly performing products and customer buying patterns plus over reliance to either. Products not achieving a desired gross profit margin and not deemed to be loss leaders were discontinued. From a monthly customer buying analysis it was possible to pick up patterns and trends. The variations were passed to the sales team to discuss with the customer resulting in both additional sales and warnings of potential quality issues.
- Inventory management – through the introduction of real time stock reports it was possible to both identify slow moving product lines and to track product expiry dates (critical for perishable items). Both of these were previously being managed through manual processes. The result was a reduced amount of product requiring promotional discount pricing as a result of short storage life and the phasing out of slow moving product lines – so freeing both working capital and storage space for faster stock turnover item lines.
- Stock write offs were analysed and product quality issues established either generally or customer specific, through addressing the root issue these were significantly reduced.
- Prior to real-time automated stock reporting some information was being prepared manually, duplicating data entry. This employee time saving was estimated to be approximately two days a week per business location.
Other factors which will affect a sales gross margin to be aware of, but not applicable to my case study above are –
- Product theft – beware of excessive product write off or stock count differences between physical and computer system amounts.
- Excessive product wastage in a production process – this could indicate poor product quantity, inefficient production process or worst case inaccurate product costing..
- Are price changes for materials or substitutions being regularly updated in costings schedules then reflected in the customer selling price lists.
- Minimum sales order value – regardless of its value its highly likely the cost of order processing and delivery (if a van drop-off service is provided) will cost the same amount.
- Excessive customer discounting. Businesses offer sales discounts in the hope their customers will buy more – so boosting the part of the gross profit margin foregone. Often this does not happen. This is best explained with an example – If a product costs £70 and the selling price is £100 the gross profit will be £30 (or 30%). If the selling price is reduced by 10% to £90 the gross profit reduces to £20 (or 22%) so the business now has to sell 50% more to achieve the same profit margin position.
In reality sales discounts are most likely to be 20-25% – i.e. goods almost sold at cost!
However work this in reverse in conjunction with a marketing campaign about product quality and sales prices could be increased by 10% to £110 so producing a 33% increase in gross profit margin for just a 10% increase in selling price!
- Warranty claims – either the labour cost of a repair or a product replacement will be a cost without any additional income – unless there are guarantees which can be recharged to the source supplier.
In conclusion the factors which have a direct effect to an expected gross profit margin are –
- Misunderstood product pricing or the production costs to manufacture
- Customer discounting
- Supplier price increases
- Warranties and returns
- Wastage (or scrap)
- Excessive stock
