Gross Profit - how to act on it
Profit and Loss Statement
you find the figure Gross Profit. It is the
difference between Turnover and Variable Cost.
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
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
- 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
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
- 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