{"id":946,"date":"2021-08-16T16:53:35","date_gmt":"2021-08-16T16:53:35","guid":{"rendered":"https:\/\/www.b2bcfo.com\/rick-perrin\/?p=946"},"modified":"2021-08-24T14:44:16","modified_gmt":"2021-08-24T14:44:16","slug":"gross-profit-optimization","status":"publish","type":"post","link":"https:\/\/www.b2bcfo.com\/rick-perrin\/gross-profit-optimization\/","title":{"rendered":"Gross Profit Optimization"},"content":{"rendered":"<p style=\"text-align: center\"><b><strong>IMPROVE YOUR PROFITABILITY <\/strong><\/b><\/p>\n<p>Gross Profit (or gross margin)\u00a0is a very important financial measure in almost every type of company. It is the profit from sales before administrative, sales and marketing expense, interest and other expense.<\/p>\n<p>It is important to focus on\u00a0Direct Margin as a\u00a0component of Gross Profit:<\/p>\n<ul>\n<li>Direct margin equals sales less direct costs. For manufacturers and contractors, direct cost normally includes direct labor, raw materials and subcontracted costs.\u00a0 For distributors and retailers this is the cost of purchasing the product for resale.\u00a0 For service firms this is a bit trickier, but normally would include direct labor, materials, subcontractors, supplies and other variable costs that are directly attributable to the completion of the service.<\/li>\n<li>Gross Profit is Direct Margin less the cost of the operational overhead required to manufacture the product, provide the service or distribute the product.\u00a0\u00a0The key word is operational overhead.\u00a0 It is very important to separate operational overhead costs from administrative expenses, sales and marketing expenses and other expenses.<\/li>\n<\/ul>\n<p><b><strong>Gross Profit Optimization<\/strong><\/b> therefore is the process of optimizing, or maximizing the gross profit from producing the product or service. Every year the Operational Plan should include a number of projects to improve gross profit, after identifying the areas with the largest potential benefits. Here are the steps:<\/p>\n<ul>\n<li>Identify the direct\u00a0costs.\u00a0Set up separate ledger codes\u00a0so you can track them.\u00a0\u00a0For example,\u00a0most firms do not properly track labor&#8230;they\u00a0put it all in one bucket.\u00a0 Direct labor should\u00a0only include time spent producing the product or\u00a0service; all other labor should be coded to indirect labor, including breaks, vacations, holidays,\u00a0PTO, seminars, training, meetings, etc.\u00a0 Indirect\u00a0labor is overhead and\u00a0should be coded as such.<\/li>\n<li>Calculate the direct cost of each major input as a % of sales.<\/li>\n<li>Develop detailed strategies as to how to lower each of the direct costs.\u00a0 Assign teams, responsibilities and timelines for achieving specific cost reduction goals.\u00a0 Often the goals will be a percentage of that direct cost to sales.\u00a0 If direct labor has been running 20% and materials 30% of sales, develop specific action plans to bring labor down to 18% and materials to 28%.\u00a0 This will bring 4% directly to the bottom line.\u00a0 Detailed labor analysis and carefully planned purchasing strategies are required to achieve these results. There are often many different ways to lower or improve direct cost inputs.\u00a0 Assign teams to investigate improvement in the following:\n<ul>\n<li>Material: Alternative materials, scrap reduction, alternative vendors, thinner or less material in the product, better negotiation, secondary vendors, inventory management, hedging, etc.<\/li>\n<li>Labor: Use of automation, use of overtime, labor efficiency improvement, time studies, labor rates, use of temps, higher or lower skill level based on the process, etc.<\/li>\n<\/ul>\n<\/li>\n<li>Identify Direct Margins down to the product line and item level.\u00a0 Fix or rid the items that do not add value to the company.<\/li>\n<li>Continue to track the cost\/sales % over time to monitor your results and make sure you hit your Direct Margin targets.<\/li>\n<li>Analyze the overhead costs (including the indirect labor) and set additional cost reduction goals for these expenses.\u00a0 Tackle the big ones first.\u00a0 Compare your costs with industry averages to benchmark your operations to your peers.<\/li>\n<li>Calculate the Gross Profit\/Margin % of sales and track over time (Direct Margin less overhead assigned or applied).\u00a0 If you improve your direct margins and reduce your overhead, Gross Profit will improve.<\/li>\n<li>Remember to factor out sales price changes. Sales price increases will create higher margins and lower costs as a percentage of sales. Don&#8217;t allow the Team to take credit for lower cost of sales just because sales price increases, go after those costs!<\/li>\n<\/ul>\n<p>By breaking down your margins and developing specific strategies for each category of cost, you may be able to add substantially to your bottom line!<\/p>\n<p>Please contact me if you are interested in learning how to apply Gross Profit Optimization techniques to improve your company&#8217;s bottom line!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>IMPROVE YOUR PROFITABILITY Gross Profit (or gross margin)\u00a0is a very important financial measure in almost every type of company. It is the profit from sales before administrative, sales and marketing expense, interest and other expense. It is important to focus on\u00a0Direct Margin as a\u00a0component of Gross Profit: Direct margin equals sales less direct costs. For&hellip;<\/p>\n","protected":false},"author":36,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_editorskit_title_hidden":false,"_editorskit_reading_time":0,"_editorskit_is_block_options_detached":false,"_editorskit_block_options_position":"{}","cybocfi_hide_featured_image":"","footnotes":""},"categories":[26,30],"tags":[38,49],"class_list":["post-946","post","type-post","status-publish","format-standard","hentry","category-business-best-practices","category-cash","tag-profitability","tag-gross-profit"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Gross Profit Optimization - Rick Perrin<\/title>\n<meta name=\"description\" content=\"A detailed process for increasing and optimizing company margins, to increase gross profit, profitablity, and company value.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.b2bcfo.com\/rick-perrin\/gross-profit-optimization\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Gross Profit Optimization - 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