Business Development Company discusses profit margins versus sales volumes

You cannot bank percentages. That is the advice provided by business strategy specialists from Business Development Company , who caution that business owners who put too much emphasis on gross margin percentages may be doing so at the expense of sales volumes.

By waiting for higher value sales, they argue, businesses may be sacrificing a significant number of lower margin sales in the shorter term, which may effectively prove to be of greater value when considered across the financial year.

General Manager of Business Development Company, Matt Larkworthy, reminds business owners that at the end of the day, they bank gross margin dollars, not percentages.

"It's important to remember that fixed costs are just that, fixed. There will always be business overheads and you need to match the type of business you are in to the type of product or service you offer," he explains.

Larkworthy notes that a premium product offering, while delivering a high profit margin, is likely to have less sales volume than a similar product with a lower price point and lower margin.

"You have to do the numbers and understand the impact of the differing value and volume that margin decisions will have on your cash flow, not just on the profits," he says.

Business owners need to ensure that stock is turning over regularly, to prevent large inventory holdings from tying up working capital and causing cash flow problems.

By setting the right gross margin and selling price, Larkworthy says, business owners can ensure that a profitable cash flow is achieved.

This is particularly relevant when considering obsolete or slow moving stock, he adds, suggesting that it is often better to liquidate such stock at a reduced margin, rather than hanging on to it for another year as dead inventory.

Larkworthy also says that the way that businesses service their clients and staffing levels need to reflect their product or service delivery.

“When people enter a discount bulky goods store they don’t expect the same level of service that is provided at a prestige car sales yard. It is all about getting the mix right to maximise the gross margin dollars you put in the bank," he concludes.