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Gross Profit - how to act on it

In a Profit and Loss Statement you find the figure Gross Profit. It is the difference between Turnover and Variable Cost.

Gross profit is a very important to have focus on. The gross profit must be as high as possible. If it becomes too small you might loose your business.

If Gross Profit goes down

What are the explanations to the specific financial problem that gross profit goes down?

There are a number of explanations. Some of them are:

  • If you run a shop you always lose some items. You could drop a bottle of cooking oil, a computer game could be stolen or a dress damaged

  • You may for different reasons have chose to sell some items with a mark up of only 20% instead of the usually 40 % mark up

  • You have built up a big stock because of low sales

  • The cost price has risen but you have not yet raised your price

  • You use more raw material than earlier

  • You may have sold some items cheaper because you wanted to reduce a large stock.
  • Too much staff compared to the size of production

Get higher Gross Profit

Possible solutions to get a higher Gross Profit:

  • Make sure that items for sale are not spoilt during transport or in the handling in the Shop
  • Investigate the price level for each of your items. Are you charging too little compared to others in the area?
    You should always take the highest price possible for your products. On the other hand, if the price is too high you might sell less.
  • Investigate the items you are selling. What is selling and what is not. If special items are going slowly, do not sell them. It is too expensive to have items in stock which do not deal with them. Maybe you could also sell other items which you do not have in the shop at present.
  • Make sure that you have a stock control system. If stock taken from the store room is not registered when it enters the sales facilities it will be too easy to sell the items without entering the money in the cash register.
  • One always has to know how much was on the shelves in the morning and how much was left in the evening. The value of the difference between the amount of goods in the morning and in the evening should be in the cash register.

Example – Production Company

If a production company or a tailoring workshop has a negative Gross Profit, what can you do?

First you should be happy that you are able to see, that there is a problem. If the company activities were not divided into sections on the Profit and Loss Statement you might not have noticed that the production/workshop was running with a loss.

Possible reasons for a low or negative Gross Profit:

  • Compared to the production, too many people are working in the workshop, the productivity is too low (the staff make too few items)
  • The price of items iare too low or too high
  • Low sale because there is no market for your products

Possible solutions for getting a better Gross Profit:

  • Adjust the number of staff to the actual possibility for sale
  • Better marketing of the products - sell more products
  • More efficient work with the same staff
  • Adjust the design or make a new collection of your product which suits the customers- improve your business model.
  • Close down the workshop and transfer the staff to other duties or they may even be made redundant.

Accept negative Gross Profit

You could also decide that you accept a negative Gross Profit if the activity has some value which can not be dealt with in financial terms.

The product might provide a valuable service which would otherwise not be available to customers and thus increase your range of customers in general. If this is the case you can decide that the Profit from other sections will have to pay for the loss in this section.

There are no secrets to success. It is the result of preparation, hard work, and learning from failure.
- Colin Powell, former U.S. Secretary of State

Gross Profit - how to act on it
SWOT Analysis + PO
Contribution Ratio vs Markup
Credit Sale
Contribution Margen or Gross Profit
Influence on Profits
Fixed Costs / Overhead Expenses
Terms of Sales and Delivery
Reduce Stock
Keep Control
The Art of Consultancy
What is Accountancy?
Principles in Accounting
Understand Financial Info
Safeguarding Your Assets
Help to Take Action
Close your Business