Are you doing a small business and making a lot of sales? Because in that case you constantly get new customers and that is also important for you to grow your business. From them, many of your customers are coming back for your products and services. They are also advising others to come and shop with you.
So where is the problem that you are not making a good profit? It seems that your profit margins are probably not being monitored. May be giving more discounts to customers without thinking about the profits of your business. You may fail to compare the total costs of running a business against your total revenue. Also, failing to track your profit margin can stunt your business growth and prevent you from maximizing your overall profit. Here, having a high-profit margin helps you to grow your small business and solve accounting issues.
Earlier in our article, we explained what the profit margin is and how to calculate it? Now, these few ways can definitely help you in increasing your profit margin and achieving successful growth in your business, which is proven helpful by multiple small businesses.
1. Reduce operating cost
One way to increase your business’s profit margin and improve profitability is to reduce operating costs. But the hardest part about reducing operating costs is knowing what else we need to cut as some expenses such as utilities, payroll and rent vary from business to business. You need to start auditing everything including labor costs, office space and utilities, employee benefits, equipment and maintenance fees, insurance, and more. After all, these are audited, you can again see where you can cut these expenses, this is a quick way to increase your profit margin.
2. Figure out existing gross profit margin & compare with competitors
Before improving your profit margin, you should know what your profit margin is so that you get an idea of how well your business is performing in terms of earning a profit. Your gross profit margin represents the profit margin of a particular product or service. Look at the retail value of your product or service and reduce the cost of materials and labor used to make it. Then, divide by the retail price. After calculating your gross profit margin, compare the industry average to see how well your business compares to the competition. This will help you get a better idea of how much improvement you need to make. Get some good benchmarking statistics from your accountant. So that you know how it compares to the industry average.
3. Analyze profit margins
If you only calculate the total gross profit margin in your business then it can cheat you. So find out the gross profit margin on each of your products and services, and analyze your gross margin on different business divisions, product categories, suppliers, or customer categories according to your business. This allows you to identify both low-margin or loss-making goods and profitable activities or products. In addition, you can stop selling low-margin items that are not able to give your business more profitable, so that you can focus more on the other profit-making products. As a result, you will be able to grow your business.
4. Avoid markdowns or discounts
If you do retail business and want to increase your profit margin, avoid marking or discounting your products as this can significantly reduce your profit. You can avoid markdown (decrease in the price of an item) by keeping a better handle on your inventory. Keep track of what is in your hand and know what is selling and what is not. To keep your inventory under check and get helpful static reports you can use a free application for your business inventory management like vyapar. In this way, you do not need to mark your prices to get rid of a product.
5. Evaluate the cost of goods sold
If you want to calculate gross margin or gross profit margin, then you can easily find out your gross profit margin through this formula:
Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100
After this calculation, the answer will be the percentage of revenue that will remain after the cut in the cost of goods sold. Cost of goods sold (COGS) is the “direct” cost of producing your product including charges related to the following: depreciation, construction overhead, labor, materials, storage, etc. All these expenses greatly affect your profit margin. If you want to increase your profit margin, ask yourself if there is a way to reduce these costs. Consult your accountant and you can say that you can make deductions that will not negatively affect your business and at the same time you will be able to increase your profit margin.
6. Balance prices of product/services
As mentioned in the point above, the way your profit can be increased by avoiding markdowns can also increase your prices. But for this you consider the standard price increase to bring in more revenue. If you do not want to increase prices in all areas of your business, you can increase the price of some of your products and services. Look at some items of your business that are very popular in the market. Over-sold products are more likely to be sold, even if you have increased the price of them. Also, when looking at your prices, make sure those suppliers match the price increase and whether they remain in your competition.
7. Increase average order price
Average Order Value(AOV) is one of the most important key performance indicators (KPIs) for online and offline sales for businesses. If you want to increase the profit margin, then focus on increasing your average order price (AOV). In addition, you can calculate the average order value using this formula; Total Revenue / Number of Orders = Average Order Price.
You can increase AOV in your e-commerce store in several ways: You can up-sell and cross-sell so that customers can increase the size of their basket or cart by getting more items. You can encourage impulse buying at checkout and promote your most profitable products in high-traffic areas.
As you can see it can be easy to think of increasing profit margins, but it can be hard to make it happen. Because being a businessman it is very difficult to decide and understand what is good for your business and what is bad. Therefore, do your research for your industry and be sure to track your final expenditure and revenue source first. It is important for everyone to know that knowing where you are right now with your profit margin helps you determine where to go next, and it is different for each business. There is no need to always make major changes in your business to significantly increase your profit margin. Sometimes small changes and some good strategies can help you in increasing your profit margin. As mentioned above, some strategies to help you in this article.
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