Small But Mighty
For small retailers, rarely, if ever, has profit been a bigger focus. Inflation, interest rates and cost-of-living pressures are squeezing business budgets and making consumers more cautious in their spending. Your profit margin – which provides essential insights like whether you’re generating money or pricing products correctly – should always be on your radar, but especially today. But what is a profit margin? And how can you boost yours?
What is a profit margin?
Gross profit is your total revenue minus the cost of generating that revenue. In short, gross profit is your sales minus the cost of goods sold. For example, if Vase#1 costs you $30 and is sold for $50, your gross profit is $20. If Vase#2 costs you $5 and sells for $40, the gross profit is $35. Although Vase#2 sold for less, its gross profit is higher, making it more profitable.
Profits as a dollar value will differ drastically depending on the value of the product, but by calculating it as a percentage it’s easier to establish a consistent picture. To do so, divide your gross profit on a sale by the revenue of the sale, then multiply by 100. So your profit margin for Vase#1 is ($20 ÷ $50 x 100) 40 per cent. A healthy profit margin varies greatly depending on the industry vertical. Your profit margin isn’t a ‘set-and-forget’ metric, it requires constant attention. Here are a few ways to help boost it.
Online store
As eCommerce booms and becomes a key way for contemporary Aussie shoppers to discover and engage with retail brands, an online store can help increase your exposure and sales. Plus, it has fewer overheads than a physical store. An online store to support your brick-and-mortar presence is an ideal way to build the ‘omnichannel’ approach consumers demand today.
Inventory management
One of the most effective ways to help improve profit margins is through inventory management, which enables you to determine which products sell quickly, which don’t and the margin on each. These insights, available through POS system sales reports, help you determine which products to stock up on to fulfil customer demand and how to prevent overstocking.
Sales forecasting
Many retail businesses are seasonal. If you specialise in beach accessories and next door sells winter gear, you’ll both have sales fluctuations from one month, or season, to another. Establish the habit of looking at annual sales reports and asking yourself which months do you make the most sales in? Do patterns persist annually? Use those patterns when planning your seasonal inventory purchasing. If you sell a higher volume of a certain product type in a given season, consider purchasing or producing more units to capitalise on its seasonality and maximise sales. By planning ahead, you may also be able to score advanced or bulk order discounts from suppliers, which will help improve your profit margin.
Operational efficiencies
Remember, it’s not just the cost of your stock that impacts profit margins. By streamlining your operations, you can increase profit margins. For example, investigate whether you could be using more cost-effective packaging, delivery methods and even in-store lighting. Time is money, so streamline productivity. Technology helps automate time-consuming tasks, like data entry, formulating sales reports or even the point-of-sale process.
These are just a few of the many ways to address your profit margin. Whether it’s increasing your average transaction value (ATV), building loyalty and incentive programs, or renegotiating agreements with vendors and suppliers, there are ways to spend less and sell more. If you consider applying them in your day-to-day operations and monitor their impact, you could optimise your retail store for long-term growth – even with challenging economic conditions.
Article originally appeared onhttps://insidesmallbusiness.com.au/finance/cashflow/how-can-small-retailers-increase-their-profit-margins