Small Business

Low Gross Margin Got You Down?

By Ken Klotz, Director-Programs,

Turner Center for Entrepreneurship

 

Low gross margin is one of the most common reasons for company failure.  If your gross margin is slipping or is lower than the industry average, repairing it should be job one.  Possible causes of low gross margin include:

1. Pricing is too low: Often, the pricing or bidding process is flawed to the point where it is impossible to make normal gross margins.  You may be trying to offer a “Mercedes” product/service at a “Chevy” price. Solution: Set pricing based on YOUR cost structure, not just on competitor prices.

2. Paying too much for inventory/materials: Buying from the same supplier year after year can result in “price creep”- slight, barely noticeable price increases over time. Solution: Periodically shop alternative sources of supply. Can you buy for less without sacrificing quality? If not, pricing must adjust upward to account for increased costs.

3. Taking the wrong types of jobs: Often the good/profitable jobs are offset by jobs that lose money. Solution: Determine if there are certain “types” of jobs that usually lose money, by going back to past jobs and comparing the bid or price against actual labor and materials spent. If you can identify commonly unprofitable types of jobs, employees can be trained to either avoid those jobs or adjust pricing upward.  

4. Shrinkage: If materials are wasted because of re-working job errors, cost of goods sold can be inflated quickly. Solution: Better scheduling- assign the worker with the right skills to the right job, not just any warm body available.  Also, employees often will take materials/tools home to do side jobs. Solution: Implement an inventory/materials control system where employees must sign for materials or tools and count inventory frequently, but at unscheduled times.

5. Low productivity: There are many possible causes: unmotivated or slow workers; inadequately trained workers; inefficient equipment or tools; and poor staging of equipment/machinery/materials on jobs, resulting in workers waiting for something to be delivered. Solutions: a) evaluate all job processes for slowdowns or bottlenecks; b) tighten supervision and institute surprise visits at job sites; c) implement pay incentives for on-time, on-budget (or under-budget) completion; d) require periodic training to speed job completion; e) create metrics to measure worker productivity; and f) purchase more efficient equipment.  

For assistance in repairing your gross margin, contact the Turner Center today at (309) 677-4321.