Article: Managing Gross Profit to Improve Net Profit
By Doug Howard, President, BDG Entrepreneurial Services

Improving sales and controlling expenses are important keys to improving net profit for any business. In the service station and convenience store business, managing gross profit is another important key to improving net profit.

Gross profit is the difference between sales and cost of goods for items sold. It can be expressed in terms of dollars or as a percentage of sales. It is a key variable in the success of any retail operation.

There are many ways that gross profit can be managed by a dealer. The first way is by setting prices. It is important to be sure that when items are priced, they are priced for an appropriate profit margin. Sometimes there is confusion about the difference between margin and markup. Keep in mind that a 30% markup will not get you a 30% margin. If you buy something for a dollar and mark it up 30%, your sale price is $1.30. This gives you a gross profit on the item of 30? or a 23% gross profit margin. The gross profit on the item divided by sales is what needs to be 30%. In this example, that would make the sale price $1.43, not $1.30.

Another important way to manage gross profit is to monitor cost increases. In many cases, dealers will calculate the margin and price on an item when it first comes into the station. But over time, most items will have incremental cost increases that may go unnoticed. The result is that over time, profit margins will erode. Watch for cost increases. They will kill gross profit.

In a store, merchandising changes can also improve gross profit. Most stores have a limited amount of retail floor space and all stores have certain areas in the store more prone to traffic than others. When making merchandising decisions, it is very important to look beyond the sales implications of a change and look at the impact on gross profit. Use high traffic areas to promote items that will maximize gross profit, not just sales.

Gross profit can also be enhanced by removing slow moving items from your selection of products. With a limited amount of space, store have been able to show significant improvement in overall gross profit by tracking the movement of items and replacing items that don’t sell or that sell slowly with items that will move. Again, the challenge is to improve the total dollars of gross profit generated by a vendor, a product line or an area of the store.

Finally, gross profit is managed by controlling shrinkage. Shrinkage represents gross profit dollars lost to employee theft, customer theft and vendor theft. It can be caused by under ringing items, actual stock loss or a number of other ways. Good loss prevention measures will reduce shrinkage and improve gross profit.

How do you track this information? Where do you find out what your gross profit is and what it should be?

The first measure of gross profit should be on your monthly financial statements. A useful income statement should detail sales, cost and gross profit by category. It is important to have enough different categories so that the information is meaningful. “Gas” and “other” are not enough to give you the information you need to evaluate gross profit and improve performance.

Extending vendor invoices is another practice that can give you detailed gross profit information. When you get an invoice, you can multiply the quantity of each item by the retail price for that item to get an extended retail. The total of the extended retails for each item is the extended retail for the invoice. This information will allow you to calculate a gross profit by item and for the whole invoice.

Vendor reports can also be effective tools for getting gross profit information. Many vendors will replace the suggested retail on the invoice with your retail price if you give them that information. This gives you gross profit information on the invoice. Velocity reports can also show you the movement for items.

The best and most flexible tool for monitoring gross profit by item and by vendor is back office software. Such software extends invoices and produces a whole host of reports about the movement of items and gross profit being generated. Many software programs indicate when the cost of an item has changed. Some will indicate when an item is being sold below the targeted gross profit for a given category. Most will give great detail about the gross profit by department.

Management information is only beneficial if it is used to make operational improvements that result in better performance. Accurate gross profit information can lead an operator to make the changes necessary to improve gross profit performance and ultimately net profit. Of the many stations that we have seen over the years, most have worked hard to impact sales and to control costs. The next great profit frontier is gross profit management.