Three Steps To Increasing Your Profit Margin By Tom Shay

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This Tom Shay presentation is based on one of the free calculators of the Profits Plus website. During this presentation To explains show several financial ratios are calculated, how to understand what they indicate, and how to improve the business based upon the information. This version of the presentation is specific to businesses in the home center and hardware industry. www.profitsplus.org

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Three Steps To Increasing Your Profit Margin By Tom Shay

  1. 1. Tom Shay, CSP Certified Speaking Professional
  2. 2. 3 Steps to Improving Your Profit Margin <ul><li>Decrease Operating Expenses </li></ul><ul><li>Increase prices </li></ul><ul><li>Increase margin (lower inventory cost) </li></ul>www.profitsplus.org
  3. 3. Improving Your Profit Margin <ul><li>11 measuring points </li></ul><ul><li>How to calculate each </li></ul><ul><li>Industry standards </li></ul><ul><li>Ask how we can improve each </li></ul>www.profitsplus.org
  4. 4. Improving Your Profit Margin <ul><li>Visit www.profitsplus.org </li></ul><ul><li>Use “Calculate business benchmarks” on our website to compare yourself to industry standards </li></ul>www.profitsplus.org
  5. 5. www.profitsplus.org
  6. 6. www.profitsplus.org
  7. 7. Current Ratio <ul><li>Looking at the picture for the next 365 days </li></ul><ul><li>Current assets / current liabilities </li></ul>www.profitsplus.org
  8. 8. Current Ratio <ul><li>Hardware stores: 4.7 </li></ul><ul><li>Home centers: 4.3 </li></ul><ul><li>LBM outlets: 2.7 </li></ul>www.profitsplus.org
  9. 9. Improving Your Current Ratio <ul><li>Can you convert a current liability to long term? </li></ul>www.profitsplus.org
  10. 10. Acid Ratio <ul><li>Also know as quick ratio – this is the emergency ratio </li></ul><ul><li>(Cash + A/R) / current liabilities </li></ul>www.profitsplus.org
  11. 11. Acid Ratio <ul><li>Hardware stores: 0.7 </li></ul><ul><li>Home centers: 1.3 </li></ul><ul><li>LBM outlets: 1.2 </li></ul>www.profitsplus.org
  12. 12. Improving Your Acid Ratio <ul><li>Can you convert any inventory to cash or A/R? </li></ul>www.profitsplus.org
  13. 13. Turn Rate <ul><li>How many times do you “sell” your entire store each year? </li></ul><ul><li>Cost of goods sold / Average inventory on hand </li></ul>www.profitsplus.org
  14. 14. Turn Rate <ul><li>Hardware stores: 1.9 </li></ul><ul><li>Home centers: 3.2 </li></ul><ul><li>LBM outlets: 4.7 </li></ul>www.profitsplus.org
  15. 15. Improving Your Turn Rate <ul><li>Can we increase margin? </li></ul><ul><li>Can we decrease inventory? </li></ul>www.profitsplus.org
  16. 16. Days Sales Outstanding <ul><li>How long does it take to collect receivables? </li></ul><ul><li>(Receivables X 365) / Net Sales or </li></ul><ul><li>Accounts Receivable / (Credit sales/365) </li></ul>www.profitsplus.org
  17. 17. Days Sales Outstanding <ul><li>Hardware stores: 42.9 </li></ul><ul><li>Home centers: 43.2 </li></ul><ul><li>LBM outlets: 54.3 </li></ul>www.profitsplus.org
  18. 18. Improving Days Sales Outstanding <ul><li>How much is this inactive money costing you? </li></ul><ul><li>Your turnover – average turnover X average A/R X Interest rate </li></ul>www.profitsplus.org
  19. 19. Accounts Receivable Turnover <ul><li>See the Profits+Plus website (www.profitsplus.org) for Accounts Receivable Aging </li></ul>www.profitsplus.org
  20. 20. Days of Inventory on hand <ul><li>How long will your inventory will last without replenishment? </li></ul><ul><li>Current inventory / (Cost of goods sold / 365) or </li></ul><ul><li>365 / Turn rate </li></ul>www.profitsplus.org
  21. 21. Days of Inventory on hand <ul><li>Hardware stores: 192.9 </li></ul><ul><li>Home centers: 112.6 </li></ul><ul><li>LBM outlets: 78.4 </li></ul>www.profitsplus.org
  22. 22. Improving Days of Inventory on hand <ul><li>Are you utilizing an “Open to Buy”? </li></ul>www.profitsplus.org
  23. 23. Return on Equity <ul><li>How well is your money working for you? </li></ul><ul><li>Net Income / Equity </li></ul>www.profitsplus.org
  24. 24. Return on Equity <ul><li>Hardware stores: 8.6% </li></ul><ul><li>Home centers: 7.8% </li></ul><ul><li>LBM outlets: 8.2% </li></ul>www.profitsplus.org
  25. 25. Improving Your Return on Equity <ul><li>How much is being taken out in dividends? </li></ul><ul><li>How much can we drive to the bottom line? </li></ul>www.profitsplus.org
  26. 26. Return on Assets <ul><li>A measurement of how well the assets of your company are producing </li></ul><ul><li>Net income / Total assets </li></ul>www.profitsplus.org
  27. 27. Return on Assets <ul><li>Hardware stores: 5.2% </li></ul><ul><li>Home centers: 5.0% </li></ul><ul><li>LBM outlets: 5.1% </li></ul>www.profitsplus.org
  28. 28. Improving Return on Assets <ul><li>Can we shed any assets? </li></ul><ul><li>Where can we improve our net income? </li></ul>www.profitsplus.org
  29. 29. Gross Profit Percentage <ul><li>Profit from a sale – expressed as a percentage </li></ul><ul><li>(Price – cost) / Price </li></ul>www.profitsplus.org
  30. 30. Gross Profit Percentage <ul><li>Hardware stores: 40.1% </li></ul><ul><li>Home centers: 29.3% </li></ul><ul><li>LBM outlets: 23.7% </li></ul>www.profitsplus.org
  31. 31. Improving Your Gross Profit Percentage <ul><li>Increase perceived value </li></ul><ul><li>Reduced cost of goods or labor </li></ul>www.profitsplus.org
  32. 32. Operating Expenses as a Percentage <ul><li>Expressed as a percentage of net sales </li></ul><ul><li>Operating expenses / Net sales </li></ul>www.profitsplus.org
  33. 33. Operating Expenses as a Percentage <ul><li>Hardware stores: 38.6% </li></ul><ul><li>Home centers: 28.3% </li></ul><ul><li>LBM outlets: 22.5% </li></ul>www.profitsplus.org
  34. 34. Improving Your Operating Expenses as a Percentage <ul><li>Suggested reduced expenses: Support staff, insurances, utilities, store supplies. </li></ul>www.profitsplus.org
  35. 35. Cost of Goods sold <ul><li>Inventory O/H start of month + purchases – inventory O/H EOM </li></ul>www.profitsplus.org
  36. 36. Cost of Goods sold <ul><li>Hardware stores: 60.6% </li></ul><ul><li>Home centers: 70.9% </li></ul><ul><li>LBM outlets: 76.3% </li></ul>www.profitsplus.org
  37. 37. Improving Your Cost of Goods sold <ul><li>Reduce inventory costs </li></ul><ul><li>Get the cost of inventory calculator from profitsplus.org </li></ul>www.profitsplus.org
  38. 38. www.profitsplus.org
  39. 39. Debt to Equity Ratio <ul><li>Comparing all of the debt (Total current,long term debt, and other liabilities) to the equity of the ownership </li></ul><ul><li>Total debt / (net worth + equity) </li></ul>www.profitsplus.org
  40. 40. Debt to Equity Ratio <ul><li>Hardware stores: 0.7 </li></ul><ul><li>Home centers: 0.6 </li></ul><ul><li>LBM outlets: 0.6 </li></ul>www.profitsplus.org
  41. 41. Improving Debt to Equity Ratio <ul><li>Do we have any nonproductive assets that we can shed? </li></ul>www.profitsplus.org
  42. 42. Improving Debt to Equity Ratio <ul><li>Should you have any loans outstanding, this ratio is often the guideline with regard to loan covenants!! </li></ul>www.profitsplus.org
  43. 43. The Profits Plus website <ul><li>8 other formulas </li></ul><ul><li>Individual item markup Sales to inventory ratio Gross margin return on inventory Sales per employee </li></ul>www.profitsplus.org
  44. 44. The Profits Plus website <ul><li>8 other formulas </li></ul><ul><li>Space productivity Personal productivity Debt to net worth ratio Accounts receivable turnover </li></ul>www.profitsplus.org
  45. 45. Space Productivity <ul><li>Hardware stores: $146 </li></ul><ul><li>Home centers: $297 </li></ul><ul><li>LBM outlets: $593 </li></ul>www.profitsplus.org
  46. 46. Sales per employee <ul><li>Hardware stores: $129,893 </li></ul><ul><li>Home centers: $218,021 </li></ul><ul><li>LBM outlets: $269,147 </li></ul>www.profitsplus.org
  47. 47. Profits Plus Calculator <ul><li>www.profitsplus.org </li></ul><ul><li>20 “measuring sticks” </li></ul><ul><li>Always available – no cost! </li></ul><ul><li>Catalog your answers and compare each month </li></ul>www.profitsplus.org
  48. 48. What can you do when you return to work to: <ul><li>Decrease Operating Expenses </li></ul><ul><li>Increase prices </li></ul><ul><li>Increase margin (lower inventory cost) </li></ul>www.profitsplus.org
  49. 49. Another 3 Steps to Improving Your Profit Margin <ul><li>Get the financials completed on time </li></ul><ul><li>Understand the financial ratios </li></ul><ul><li>Use the Profits+Plus website to create a monthly checkup! </li></ul>www.profitsplus.org
  50. 50. Thanks to my competitors My competitors do more for me than my friends. My friends are too polite to point out my weaknesses, but my competitors go to great expense to advertise them. My competitors are efficient, diligent, attentive, and would take my business away from me if they could. They keep me alert and make me search for ways to improve my products and service. If I had no competitors I would be incompetent and inattentive. I need the discipline they enforce upon me. www.profitsplus.org
  51. 51. Final Note <ul><li>This presentation will be specialized to your industry and your attendees’ specific needs. </li></ul><ul><li>For more information about having Tom present for you, contact us at (727)464-2182 or visit our website: www.profitsplus.org </li></ul>www.profitsplus.org

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