Friday, 10 June 2016

The Bean Counter - Improve your Profit Margins

by Guild Member Helen Gould BA (Hons) CIMA Dip MA

As a busy crafter, attention to detail and the pride given to creating a quality item is second to none and that is what your intended customer is looking for too. But your profit margins also deserve the same attention to detail, in order to maintain a healthy business that can continue on trading into the future (this is known as a ‘Going Concern’ in accountancy lingo). In the March 2016 issue of the PCG magazine, I took you through the steps of how to work out your profit margins and this month’s article is all about ways of improving your margins.
To be exact, the Gross Profit Margin is the key factor when it comes to improving the overall Net Profit of your business. Now this is not a one-time fix all solution, but rather an exercise that should be a part of an annual review as a way of keeping your profit margin healthy.

Here are four ways that you can improve your Gross Profit Margin, but before you rush off to apply all of the ideas at once, take the time to implement one change at a time as a way of testing and assessing the way in which your customers react. Incremental change is far better than rushing head first in to creating radical changes to your business, like a bull in a china shop!

1.    The Sales Price – Ask yourself, are you asking the right price for your craft creations in comparison to your closest competitors? Do not be afraid to put your prices up as your customers will not shy away from a higher price tag. Especially if they see that that standard of craftsmanship and materials used are of a very high quality.

2.    No Discounts – It’s true that everybody loves a discount, but it’s a killer to your profit margin and a short-term fix to attract customers. If you offer discounts at the moment, it’s time to stop. Short term you may lose a fickle few customers but you have to think long term. Let me put it another way, if you continually discount your prices by 10%, you will need a 25% increase in your sales, just to keep you in the same position as if you had not given the discount in the first place!

3.    Cost of Materials – Now this is a tricky aspect of cost control when it comes to being able to reduce the cost of making your product, without seeing a drop in the quality of the materials bought. Look at your supplier invoices for the raw materials bought, does the supplier offer better value if you order in a bigger quantity? Are there other suppliers that offer the same quality or slightly lower (taking care that the overall quality will not affect your finished item) for a better price?

4.    Reduce Wastage – Where possible, plan the use of your raw materials in order to minimise wastage on the production of your finished products. By being more efficient with the way in which you use your materials will mean that you can produce more goods to sell, thus, increasing your profit margins.

So that’s the key areas covered for the Gross Profit Margin, but what about the ‘Bottom Line’ aka the Net Profit Margin? Now this is the challenging aspect of business cost management because we are now looking at the operational costs of running the business. Having said that, it’s not an impossible task to reduce some costs in this area, for the small business owner. 

In the last issue, I used an example of operational costs for a craft business owner, Mary-Jo in relation to attending a craft fair and as a reminder, the costs are as follows;

Stall Fee            £15.00
Fuel                   £5.00
Refreshments    £3.00
Time at Fair       £15.00     (£3.00 x 5 hours) 
Total Operating Cost    £38.00
So what costs can we hope to reduce? The first step is to identify the cost types involved, which are in this case, Fixed and Variable. Fixed costs are costs which do not change, no matter how many sales you make and Variable costs are cost that change with the activity of the business. A simple table can be used to identify the above costs as follows;

Normally fixed costs cannot be changed and in this case the pitch fee is £15 but I have noticed an increase in cost saving savvy crafters, who have halved the cost of a pitch by buddying up with a fellow crafter to share the pitch. Now this can reduce your costs but it should be noted that it can reduce your ability to display the entire range of your goods for sale. The time spent at the fair is normally a set time (unless the organisers permit an early pack up) and therefore should be viewed as a fixed cost.
Variable costs on the other hand can be more controllable, and looking at the example, Mary-Jo expects to use £5 worth of fuel. But she can double check her route to see if there is a more fuel efficient way to/from the venue and to only carry the stock she needs for the day. She also expects to spend £3 on refreshments but by taking a flask and sandwiches, she can cut the cost out completely.

One key variable cost that should not be overlooked is the cost of Labour (Wages) to produce the goods. As sales increase, a smarter way of working needs to be found in order to keep costs down and at the same time, keep up with the demand. I’m not trying to be a kill joy here but if you look at how you produce your finished craft products, is there any stage in the production that mass make the components and therefore have a bit of buffer stock as work in progress? A key cost/time saver here is known as ‘Set Up Costs’ and as an example, when I am making my candles, I tend to mass produce the wick tabs by laying out all of the materials that I need. I then make the tabs for the current order and then over make to act as buffer stock for surprise orders.

Now you may be thinking that going over the expenses of the business to find potential cost savings is a real chore, in comparison to actually making your craft products. But it’s an essential part of business management if you want to increase the profit margins of your business.

In the next issue, ‘Cash is King’, a focus on producing a simple Cash Flow Forecast, which is a useful business planning tool.

Do you have any accounting questions? Email us at the Guild and we will pass them on to Helen.
Helen is a member of the PCG and you can visit her here

No comments:

Post a Comment