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Protect your Profit Margin

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09 / Oct / 2014

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Your profit margin is that (often too small) difference between what it costs to produce a product or service and the price you sell it for.  In today’s market climate many businesses are struggling with rising costs that are putting pressure on profit margins.

Allowing profit margins to diminish can strangle a business in the long run.  It’s important to make every effort to maintain your margin, never accepting even a small reduction.

If your margins are being pinched, then consider some or all of the steps below.

1/ Shop around.  When was the last time you checked the competition on electricity, telecom or gas prices?  The potential savings available in boring old utilities in can be surprising.

2/ Talk to suppliers.  If you are on good terms with your suppliers, you have a better chance of getting special deals or preferential treatment.  Find out what discounts each of your suppliers offer and take advantage of what ever is on offer.  Review your terms regularly, and check whether other suppliers can give you a better offer.

3/  Review bank loans.  If you have debt then make sure you are reviewing the terms of your bank loans and comparing to what’s on offer with other banks.  We aren’t suggesting that you switch banks every time another bank has a better offer – but you may be able to use this information to secure a better deal with your existing banker.

4/ Consider fixing interest rates.  Interest rates remain at an all time low in Australia. Now might be a good time to consider fixing the interest rates on some of your debt to prevent margin reduction once rates start to rise.

5/ Review internal processes.  This doesn’t sound like a cost saver, but for many businesses staffing represents their highest business cost.  Increasing efficiency and productivity, also increases margins.

6/  Increase prices.  When cost increases begin to eat into your profit margin then your price needs to go up.  There is debate about whether it is better to increase prices often and incrementally or less often in one big hit.  But whichever way you choose to raise your prices, the most important thing is that you don’t wait too long.

7/ Take advantage of technology.  Technology is not just fun and games.  The latest business tools allow you and your staff to operate more efficiently.  Make sure you know what’s available and weigh up the cost/benefits.

8/ Reduce credit card purchases.  Purchases made on a credit card will incur a finance fee, which obviously cuts into your profit margin.  Consider offering credit card purchase only on minimum purchases, or charge a finance fee for use of a credit card.

9/ Avoid “over servicing”.  Particularly for those in the service industry, “over servicing” can gobble up profit margins.  It’s always a difficult balancing act between providing a service that will keep customers coming back and not overinvesting in customers to your own detriment.

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