Take The Lead: Gross Profit - The Road Less Traveled

By Brian Canning, Contributing Editor

In first measuring and then attempting manage a business, we are often faced with the need to make strategic decisions in getting ourselves from an unprofitable state to one of profit. Choices will often fall between increasing sales, cutting expenses or increasing gross profit. Though working to increase sales would seem a logical response and cutting expenses will certainly have a positive effect on bottom line performance, gross profit is by far the most effective way to improve cash flow and bottom line performance. There is no quick fixMost of us, when faced with a cash deficit, will immediately set about doing two things. We will work harder and we will spend less. As individuals this might mean more hours at the office, turning out the overtime and at home, eating out less and doing without the luxuries in our lives.
We might also put off buying those new golf clubs and maybe cut back on staff overtime and watch our utility bills. The problem here is that increased sales without profits just has you working harder with no return and though cutting expenses is generally a good thing, it is unlikely that you will be able to cut them far enough to improve profits before we start reducing production capacity and our ability to operate. Gross profits might be a solution that will allow us to improve the return on our current sales.What if there was another path to profitability?We do an exercise in our classes where we take a hypothetical shop with hypothetical sales, costs and expenses. We ask our clients what things they would do to increase bottom line return (NOP). The most common response we get would be to increase sales. Maintaining shop efficiencies and margins where they were, we increase our imagined sales by 20%. There is no discussion of our ability to handle this or if it were even practical. We add 20% to the top line, track flow through to the bottom line and note profit dollars generated. A significant number to be sure! Yet in the practical world you cannot budget for a sales increase such as this and unless there is an effort toward our being more efficient and productive, we are likely to be very busy, much stressed and barely better off for all the effort.
Next we take our shop and decrease our expenses or fixed cost by 10%. Again, in the real world it is not entirely practical that we cut our expenses by this drastic an amount but for the sake of this exercise we do it and with all other performances being equal, we once again track bottom line performance. There is no doubt that the very second you reduce expenses you will see an improved bottom line and we definitely did. An even larger number! In most shops rent is the single largest expense with advertising being a close second. I would encourage any shop owner to frequently audit expenses, look for ways to reduce this number but only in ways that would allow us to continue to operate efficiently.
Finally we took this imaginary shop and simply manipulated the cost numbers to show a 5% increase in gross profit. Now, unlike the other two exercises, this small increase in gross profit would be completely practical and in most cases, easily doable. With a very modest adjustment in how we price our parts, in how we pay our techs and in how well we control overtime, we could easily improve gross profit by 5%. Other ways would include asking for deeper discounts from our parts vendors or in building our menu items and canned jobs to reflect a very modest gross profit increase. And finally, pay attention to what prices we end up charging our customers. Negotiating a great price will mean little if you give it away in discounts. In doing this exercise we were able improve bottom line performance dramatically and well beyond what we accomplished with a huge increase in sales and much better than we accomplished in slashing our expenses.
Be realistic, but flexible In searching for solutions to our problems with cash flow we need to be practical and confine our efforts to those things that we can reasonably accomplish. Chasing sales numbers would seem a reasonable response but unless you are profitable, which the average shop is not, you will work very hard to get a modest return. Cutting expenses is another rational approach but one limited by what is real and achievable. There are few businesses that have 10% fat to cut from their expenses and too often in the effort, we end up reducing our ability to efficiently operate. Sprinting with one less leg becomes an exercise in futility. Most important in all of this is how easily we can affect gross profit. It is just our getting a little better at things we already do. Gross profit is the path and cash is our destination.
Profit and cash flow are such that we are struggling. We are having difficulty in making ends meet or hitting our goals. Something has to change. It is not simply selling more or cutting back on expenses. Search for ways to be more efficient and productive. Be different. Be profitable.