So far in this series, we’ve discussed how a computer can automatically store, organize, and maintain the information collected from each sale (Part 1), and how this specifically helps a business control its inventory (Part 2). Now we will see how a computer also equips a company to increase its profit margins.
Business owners are often busy dealing with everything from leaky faucets to advertising, making it impossible to spend the time to keep track of every detail of their business transactions. How can you stay on top of slight increases or decreases in your profit margins and figure out what’s driving them? Since a computer keeps track of everything for you, it is able to show you the smallest details as well as overall statistics and trends at a glance. Having this information at your fingertips will make your business money and prevent pennies from being wasted.
Even a small increase in gross margin will be reflected in an increase in net profit. Suppose, for example, that you have a business that earns $1 million a year and that your average profit margin is 50 percent, or $500,000. Also suppose that expenses are $440,000, which makes your net profit equal to $60,000. Now, if by looking carefully at inventory and reviewing management reports, you can increase your profit margin to 53 percent, what effect will this have on your net income? Well, the gross profit increases to $530,000. Expenses are not affected and remain at $440,000. However, the net profit becomes $90,000! Yes, there is a 50 percent increase in the bottom line due to an increase in profit margin from 50 to 53 percent.
Why should you expect to increase your margins?
There are many ways that profit margin dollars are lost and a computer can solve many of these problems. Here are some examples:
- Employees may enter incorrect prices when selling inventory; while a computer provides consistently high accuracy.
- The clerks enter the correct prices, but the prices go up. With a computer, prices can be easily tracked and adjusted.
- Some merchandise has been on the shelf for so long that the selling price is no longer valid. Your original cost may have been $5 per item and you are selling it for $10, but a computer will show you that the replacement cost is $7.50. (In this case, adjusting the price is not necessarily “increasing your margins” but simply being smart.)
- Some items sell so well that they make a better profit margin. A computer can reveal which of your articles are the most popular.
- Because a computer can help you track the exact volume of items you will be moving during a given period, you can better take advantage of manufacturer discounts. For example, a certain manufacturer we deal with is always pushing for sales at the end of the quarter (every three months), so they always call us with some kind of special offer, which is usually an additional 20 percent off. what do we do? We see what we’ve sold in the previous three-month period and use that information to place our next order. We try to order a three month supply of those items. Now, naturally, this reduces inventory turns to four times a year, a number most experts will agree is very low; nevertheless, we’re getting an extra 20 percent off merchandise, which, for us, justifies carrying that extra inventory. Getting that inventory at 20 percent off allows us to price slightly below the competition and maintain our advantage. Your situation may be different. The point is that without the computer providing recent sales information at our fingertips, we’d only be guessing.
- Some current reports show that more than 50 percent of the “shrinkage” is due to internal problems. No manager can monitor every transaction. Do you know if when your employees mark a sale they sell it for less than the list price? Or if they give “special discounts” to family or friends? Employees to know when inventory is not being accurately monitored. A computer system that tracks these items greatly discourages theft and abuse, and you can expect to lessen your loss. No computer system will eliminate employee dishonesty, but it can be a big improvement. Business owners sometimes ask us if buying a computer system will stop theft. The answer is unequivocally no. How will employees steal? The same way they do now, by not marking the sale. Do you know if they do this? Yes, because the computer tracks the inventory, and you will find that the inventory on your shelf does not match the computer report. That information, used correctly, will allow a smart business owner to identify where the problems are coming from.
Note:
Interestingly, sometimes the employee who is most resistant to computerizing a company is the one who causes the contraction. During a recent installation at a ski supply store, all sorts of computer implementation issues were encountered. The computer didn’t accurately track inventory, the numbers didn’t add up, etc. The manager blamed the computer. The funny thing was that every time the owner looked at the computer, it worked perfectly. Ultimately, it was determined that the store manager was the cause of the problem. He had been stealing from the company for five years. Now, with a computer in place to track hundreds of expensive items, those lost items could actually be examined.
In a business that earns $500,000 or more per year, it is common to have losses of $25,000 (5 percent) unless you are using a computer.
conclusion
Computerizing your business is the most practical way to track all the information you need to know, so you can make the best decisions to control your business profit margins. Check out the final part of this series (Part 4) to find out how a computer improves customer service, controls expenses, and increases efficiency.
