Ways to Improve
Gross Profit Ratio: Two ways to improve the Gross Profit Ratio. 1) Increase prices of goods or services provided. However, make sure that your prices remain competitive – thus see what prices your competitors are charging or find ways to make and market products with premium features to competitors thus justifying the higher price. 2) Find ways to lower your direct or variable costs – this could be by reducing factory expenses (making more with less effort), reducing direct labor (get less people to do more) or find lower cost materials that go into your goods or services – to name a few. The idea here is to generate either the same or more revenue per product or service while reducing the costs of producing or providing those products and services. Gross profit is what the business will then use to cover overhead, operating expense, taxes and profits, thus if the business is not making enough here, it cannot make it up elsewhere. Items to consider in improving this ratio:
- Poor purchasing efforts – not getting the materials needed at advantageous pricing (like bulk buying).
- Poor inventory control – buying to much materials and realizing additional costs like spoilage or obsolescence.
- Poor product mix – spending more time and effort (expenses) on lower margin products.
Pretax Profit Ratio: Provided the business is earning as much as it can in gross profit, improving this ratio would require finding ways to reduce overhead or operating expenses. This could be done by:
- Reducing fixed expenses related to property, plant and equipment including rent/lease expenses, utilities, maintenance, etc – without hurting production or operations.
- Reducing marketing and sales expenses (getting better marketing and sales results with lower expenses – efficiency).
- Reducing General and Administrative expenses related to non-direct wages and salaries and salary expenses, supplies, accounting, bad debt, entertainment, insurance or any non-direct expenses – non-directly related to creating or providing products and services.
Other financial ratio calculations you may want to evaluate:
Disclaimer: These ratios are for education purposes only and are in no way an adequate substitute for a professional financial advisor.
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