Gross profit is the rand value of the difference between what you pay for goods and what you sell them for. The GP% is a representation of the gross profit as a percentage of turnover. The reason we revert to GP% as a management tool is that it allows you to track your percentage profit across all your products and services. This percentage is crucial for managing the business effectively. The easiest way to improve a business is to increase the gross profit, but it is also the easiest way to mess it up if the gross profit percentage (GP%) is not controlled in a proactive way. Postmortems are useless. Practice management software must allow for daily management of the GP%. Humint online software for optometry can do that.
It is surprising how often the GP% is misunderstood, yet it is so important.
The formula is as follows:
Markup divided by the selling price X 100 = GP%
or
Cost price divided by selling price X 100 = cost of
sales percentage
The sum of the two will always add up to 100. For
example, if the GP% is 65 percent, and the cost of sales percentage is
35 percent.
In real numbers: A frame costs R100, and the markup is
R200, which makes the selling price. R300. 200/300 = GP % is 67%
Note that the GP% can only be influenced by factors that can affect the cost of goods, or what they are sold for. For example, rent or telephone has no impact on the GP%. The GP% is a great management tool. It can warn the owner that any of the following factors can have an adverse effect on net profit.
Factors affecting GP%
1. Purchase price. The less one pays for a frame, but sells at the same
price as before, the higher the GP%.
2. Selling price. The higher the mark-up, the higher the GP%.
3. Shrinkage (stealing). By losing stock, one is effectively,
increasing the unit cost decreases the GP%.
4. Remakes. Using another pair of lenses or frames raises the cost
paid for stock. GP% decreases.
5. Discount given. can have a devastating effect on the GP%.
If one gives a 20 percent discount, and the GP% is running at
65 percent, one would have to sell almost 50 percent more goods
to be in the same net profit position.
6. Discounts received. A discount from a supplier obviously reduces the price you pay, and the GP% increases.
7. Redundant stock. Writing off stock will decrease the GP%.
8. Undisclosed income. Not declaring all sales effectively erodes
sales, or selling price, and lowers the GP%. "This is obviously done
to lighten the tax burden and is illegal. A low GP% will always
raise the suspicion of undisclosed income with the South African
Revenue Service (SARS
9. Trade discounts. If these are not reflected in the books at the right time, the GP% can be distorted. Discounts are sometimes put through quarterly, which can cause havoc with the GP%. The software programme should ideally always reflect the true cost of sales, net of discount.
10. Selling the wrong product mix. By selling mostly designer frames with a lower markup, the GP% will decrease. Knowing the industry benchmark for GP% can be an effective way of measuring business performance. Optometrists should achieve a GP% of 65 percent. High-performance practices can post a GP% as high as 70 percent. Once a GP% lags below the benchmark, it is essential that you immediately establish the cause and manage it on a weekly basis. If a leak goes unnoticed for an extended period, the impact on net profit can be devastating.
Avoid poor buying
Three things can drive down the price of frames. The size of the order, terms of payment, and out-of-date styles. Those styles that are outdated are often discounted, but are best left alone. However, every effort must be made to capitalise on volume and cash buying. Impulsive buying in the absence of a clear strategy is the biggest threat to the GP %. Discounts will be forfeited by placing small orders from just about every sales representative who knocks on the door.
Humint online software for optometry has the capability to report a daily GP%. It requires a monthly stock take, which can be a straightforward exercise once set up properly. It employs barcodes and a scanner. Yet so many optometrists see this as a hardship. The archaic practice of reviewing financial performance a year after the fact is ludicrous in the presence of today's technology. To repeat, a GP% leak is the easiest way to corrode net profit surreptitiously, but also the easiest way to improve net profit if managed in a proactive way instead of looking at it after the horse has bolted.
Humint can be the answer.