Fiducial | We help your business grow and be profitable.

by Jay Heaton

November 2, 2004—Many small business owners get so focused on improving their revenue (sales) that they forget about making sure that they make a good profit on the products they are selling. Managing your gross profits involves more than just knowing how to mark up an item correctly. Listed below are four key factors that affect gross profit:

1. Cost of Merchandise—Purchase your merchandise from the vendors that give you the best price based on volume purchased. Also look for vendors who give discounts for quick payment. Make sure you receive the merchandise you paid for by checking it in when it’s delivered so some of it is not left on the truck. Use a purchase order number system that prevents any merchandise being delivered that an employee ordered for their own use at your expense.

2. Storage of Merchandise—Make sure you have a place to lock up as much of your merchandise as possible that is not on display. Display the merchandise using a set quantity of each type so it’s easy to see when some are missing. Then check the register totals to make sure it was sold.

3. Mark Up—A common mistake is to mark up products as a percent of cost. This is the wrong approach because the item should be marked up as a percent of the selling price, not cost. If you should make a 40% profit on an item then you should multiply the cost by a factor of 1.7 to arrive at the selling price. For example, if your cost for an item is $30 then you multiply the $30 times 1.7 to get a selling price of $51. Your gross profit will be $21 which is 41% of the selling price and 41% of the cost ($30) is $12.30 or $8.70 less profit than marking it up on the selling price. This difference can add up quickly when it applies to the many items that you sell.

4. Theft—While there is a problem with customer theft, the major concern centers on employee theft. The use of video cameras, inventory control check outs and making employees responsible for what happens during the time they are working all help to control employee theft.

By following these recommendations over a period of time, you will be amazed how a 5%-10% increase in gross profit will help boost your net income at no cost to you.

James Heaton is a Fiducial Business Advisor based in Columbia, MD.

Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: stephen.parezo@fiducial.com.

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