Kurt Tyack, director at Signarama Southern Africa, says if you are feeling the squeeze, it’s most likely margin creep. A concerted effort is required to avoid margin creep and maintain profit margins.
Margin creep refers to the gradual erosion of a company’s profit margins over time. Many business sectors are reporting this problem at present and while a tough economy and competition can explain some of this phenomenon, we need to be aware of the other things that can lead to margin creep in the sign industry.
Price increases: the cost of doing business rarely decreases, so it’s important that we review our own pricing from time to time in order to adjust for this increase to maintain profitability.
Shrinkage / private jobs: theft, and private work by your staff can mean that your stock is being used to do work which does not generate revenue for you.
Stock control / ordering processes: shrinkage is generally tied to lax stock control and ordering processes. It’s too easy to keep ordering new stock, without checking to see what is piled up in the back of the shop. Stock control and ordering should be the responsibility of one person, and if they are an employee (not the owner) they can be incentivised based on margins/profit to promote efficiency and costs saving.
Redo’s / quality control: do you know what percentage of your jobs going out results in redo’s? Are mistakes and redo’s reported internally, or are they just brushed under the carpet? If not, it may be worth tracking this for a three month period to see how much extra material and time goes into fixing work which should never have left the workshop in the first place or has been installed incorrectly. Track this in terms of number of jobs (eg 5 out of 50 jobs required redo’s) and in Rand value (R100,000 out of a turnover of R500,000 required redo’s) and then add the additional material costs. Also make sure proofs are being signed off, prior to production.
Negotiating pricing: when last did you negotiate better pricing on your biggest purchase line items? We always recommend forming lasting relationships with suppliers and not jumping from one to another for a few bucks. If you have been loyal to a supplier, an open discussion about your business and material needs will most likely result in better pricing for you. Focus on a few fast movers, not all of your material purchases.
Accounting classification: from a signage business model point of view, only materials purchased to manufacture signs should be classified as cost of sales/materials. Labour, fuel, rent etc. are operating expenses. Sometimes your accountant will include some of these overheads in your cost of sales/materials which can skew your figures.
Mix of business: mix of business refers to your percentage of in-house vs. outsourced products. If you are selling too many outsourced products, it may be time to invest in equipment to bring that product or service in-house at higher margin. You can also increase your in-house sales by offering higher commissions on those products and services, compared to outsourced products, to your sales team.
Financial reports: how often do you receive and review your financial reports? Quite often, the problem of margin creep is only identified once the horse has bolted. I recommend reviewing your financial statements every month, but looking at gross profit and cost of materials on a 3 month rolling average to avoid the effect of large orders.
SIGNARAMA
https://www.signfranchise.co.za/
