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Article: Managing Gross Profit to Improve
Net Profit
By
Doug Howard, President, BDG Entrepreneurial
Services |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| How do you track this information? Where do you
find out what your gross profit is and what it should
be? |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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