So, a quick recap of what this is all about. It’s about taking small incremental steps on a continuous basis to make big changes to your business, and the key is that the small and continual changes magnify when they combine and flow to your bottom line.
Last week in part 1, I gave you some ideas for increasing your top line by 1%, and this week is about improving your gross margin. Whether you’re a manufacturer or service business here are my very best tips for finding ways to increase that margin.
Manufacturing business
- Identify any low margin or loss making products
- Identify any low margin, loss making or high maintenance customers
- Negotiate a 1% price reduction from your suppliers, ask then to sharpen their pencil even a little, get new suppliers in to quote
- Don’t always go to the same supplier because of ease, shop around
- Make sure someone checks the goods delivered to delivery note, and then to invoice – it’s amazing how many errors your suppliers are making (one client made £40k a year by doing this)
- Buy in bulk for discounts (if cash flow allows)
- Negotiate rebates from your largest suppliersM
- Avoid carriage charges
- Get a reduction on your transport costs
- Negotiate a 1% settlement discount for paying on 30 days (most people pay on 45 -60)
- Get 1% more out of production each day with the same people
- Set efficiency targets that people are measured on
- Reduce wastage by 1%
- Take on a continuous improvement approach to everything you do
- Identify inefficient processes or bottlenecks that are restricting output and therefore your sales
Even if you did 3 of these, just think how much you’d increase your gross margin by. And don’t forget this goes straight to your bottom line, and that turns into extra cash.
Service business
- Identify any low margin or loss making services
- Identify any low margin, loss making or high maintenance customers
- Know your capacity revenue –how many billable staff, target billable %, hourly rate. Then you see how much revenue you’re achieving compared to what you could be making
- Know what your billable time % target is for all billable staff
- Make sure the target billable rate for each person is being hit
- Do you have jobs or clients where you always write time off (I bet you do!) well find out why rather than just accepting it. What you can do to get that job or client back to profit?
- You should know what the target revenue is for each billable person – measure and address any issues
- If you have staff who can’t hit the targets do they need training or replacing?
- Look at all of your other direct cost of sales; meeting costs, networking, lunches, travel time etc.
- Remember that every staff hour you have in your business is an item of stock, once that hour has gone, that hour of stock goes in the bin. That hour has to be paid for but has gone forever if it wasn’t sold
- Record each month how many billable hours you did NOT charge for – what did this cost you in revenue?
Next week I’ll be covering overheads and how to find savings. By then you’ll be well on your way to increasing your net profit and therefore your cashflow. Do let me know what successes you have, I love hearing from people who put my tips into action.