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.

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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>
  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>
  4. 4. Improving Your Profit Margin <ul><li>Visit </li></ul><ul><li>Use “Calculate business benchmarks” on our website to compare yourself to industry standards </li></ul>
  5. 5.
  6. 6.
  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>
  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>
  9. 9. Improving Your Current Ratio <ul><li>Can you convert a current liability to long term? </li></ul>
  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>
  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>
  12. 12. Improving Your Acid Ratio <ul><li>Can you convert any inventory to cash or A/R? </li></ul>
  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>
  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>
  15. 15. Improving Your Turn Rate <ul><li>Can we increase margin? </li></ul><ul><li>Can we decrease inventory? </li></ul>
  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>
  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>
  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>
  19. 19. Accounts Receivable Turnover <ul><li>See the Profits+Plus website ( for Accounts Receivable Aging </li></ul>
  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>
  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>
  22. 22. Improving Days of Inventory on hand <ul><li>Are you utilizing an “Open to Buy”? </li></ul>
  23. 23. Return on Equity <ul><li>How well is your money working for you? </li></ul><ul><li>Net Income / Equity </li></ul>
  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>
  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>
  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>
  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>
  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>
  29. 29. Gross Profit Percentage <ul><li>Profit from a sale – expressed as a percentage </li></ul><ul><li>(Price – cost) / Price </li></ul>
  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>
  31. 31. Improving Your Gross Profit Percentage <ul><li>Increase perceived value </li></ul><ul><li>Reduced cost of goods or labor </li></ul>
  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>
  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>
  34. 34. Improving Your Operating Expenses as a Percentage <ul><li>Suggested reduced expenses: Support staff, insurances, utilities, store supplies. </li></ul>
  35. 35. Cost of Goods sold <ul><li>Inventory O/H start of month + purchases – inventory O/H EOM </li></ul>
  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>
  37. 37. Improving Your Cost of Goods sold <ul><li>Reduce inventory costs </li></ul><ul><li>Get the cost of inventory calculator from </li></ul>
  38. 38.
  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>
  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>
  41. 41. Improving Debt to Equity Ratio <ul><li>Do we have any nonproductive assets that we can shed? </li></ul>
  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>
  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>
  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>
  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>
  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>
  47. 47. Profits Plus Calculator <ul><li> </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>
  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>
  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>
  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.
  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: </li></ul>