Six Ways to Make More Money in Business
1. Buy Lower
- Join with others to create a larger quantity in order to buy at a lower cost.
- Rebates from manufacturers. – Everything is negotiable and manufacturers want more of your business. If you can combine all of your purchases through one manufacturer, you become a larger customer and may be able to negotiate a credit rebate based on your increase in purchases over the prior year.
- Negotiate with manufacturing to extend old pricing for 6 months or the longest period of time you can get. They may have existing stock purchased at a lower cost. If you don’t ask, you don’t get.
- Negotiate blanket purchases with releases to buy better (lowers cost of purchase order) and it helps the manufacturer plan production. Remember; if you commit to it you need to buy it.
2. Sell Higher
- RAISE THE PRICE ! ! !
- “A” - products get raised 1/2 of 1% (except items on contract) = .50 per $100
- “B” - products get raised 2% = $2.00 per $100
- “C” - products get raised 5% = $5.00 per $100
- Whenever you get a price increase from the manufacturer, raise your price 1/2% more.
- Raise the price as much as you can on anything you can to make up for the items you have to sell below a reasonable margin. Most of your “A” items go too cheap, so you may have to make 400% on others to make up for it. You are not taking advantage of the customer; you are staying in business! The customer is worried about what he pays for the items he buys frequently and in quantity. He usually does not check on the odd items.
- Write fewer credit memos – they are costly so try to get the order right the first time!
- As a general rule, you should make at least 25% – 30% on your money and 20% on money your borrow; if this is not what you are making, then you need to look at your business model.
- If you have an ROI (return on investment) of 30%, you can only distribute 1% of sales to the owners and the rest must go back into the business to fund 10% annual compounded growth. You are in business to make money and that is not a crime.
- Reduce the discounts you give.
3. Collect Sooner
- If you give payment terms, shorten invoice processing time. The sooner they get the invoice the sooner they can pay it.
- Email/Fax Invoices to get paid sooner
- Apply better credit collection techniques; contact NACM (National Association of Credit Managers.) or find a company that uses them so you can get a credit report on large customers.
- Shorten (lower) number of days receivable.
- Do not offer cash discounts!
- Bill right the first time because the time between your sale and payment is costly; time is money.
- Lower comfort zone, collect sooner, don’t let it go past 36 days; the squeaky wheel does get the grease!
4. Negotiate Extended Dating
- When taking on new product lines, negotiate extended dating if possible; you have to be big enough for a manufacturer to consider this. If you can get their products into a particular store through your contacts then you might have some leverage to negotiate.
- Your goal is to reduce your asset base & sell it several times before you pay for it; this allows you to use your vendor’s money.
5. Turn Your Inventory More Often
- Move away from the way you think about inventory; it should work for you and every time you sell it, profit drops to the bottom line.
- GMROII – Gross Margin Return on Inventory Investment; business is a math problem and you need to know how to make money on your products.
The GMROII answers the question “for each dollar at cost, how many dollars of gross profit will I generate in one year?”
6. Improve Operating Efficiency
- Implement a Quality Process
- Change the system to be less redundant and more efficient
- Remove the waste
- Improve the quality
- Lower the cost
- Capture the market
- Make more money
- Stay in business
A trade discount is a percentage reduction from the list price offered to certain categories of customers by the seller. Often the manufacturer’s list price is approximately the resale price of the retailer. If the retailer is to sell at the suggested price, the merchandise must be bought at a discount of the retailer is to cover his overhead and earn a net profit.
A trade discount of 50% reduces the list price of $436.00 by $218.00 so 436 – 218 = $218.00
The amount of the discount is just an application of the basic percentage formula P = BR where:
P – trade discount, B = list price, and R = discount percent
In this problem P = ?, B = $478, and R = 40% so P = BR
= $478 x 0.40 =$191.20
List price: $478.00
Trade discount: - $191.20
Net Price: $286.80
A quantity discount is a reduction in price because of the amount purchased. Quantity discounts may be based on:
- The number of units purchased
- The dollar value of the entire order
- The size of the package purchased
If an item has a list price of $25.00 what is the net price on an order of 30 units?
P = quantity discount, B = list price, R = discount %
$750.00 List price ($25 x 30)
-322.50 Quantity discount ($750 x 0.43)
$427.50 Net Price
Terms of Payment
Credit terms are shown on the invoice, usually in an abbreviated notation. The most common credit period is thirty days and will appear on an invoice as: “net 30 days” or “N/30”
This notation means the buyer has thirty days after the date on the invoice to make a payment. If the bill is not paid within 30 days it is considered to be “passed due” and may be subject to penalty charges.
Cash discounts are a percentage reduction in price for payment within a specified time. Cash disocunts usually range from 1/2% – 3% and are indicated on the invoice as follows:
2/10, N/30 means you can take 2% discount off the merchandise if you pay within 10 days of the date of the invoice, and if paid within 30 days there is no discount. Cash discounts are only calculated on the value of the merchandise and never apply to freight charges.
A list price on an invoice dated November 1 is $195.50 with terms of 2/10, N/30. How much should be remitted if the bill is paid on (a) November 10th? How much if paid on (b) November 30th?
- November 10th falls within the cash discount period of 10 days following November 1 so,
$195.50 List Price
-3.91 Cash discount ($195.50 x 0.02)
$191.59 Amount to be remitted if paid by November 10th
- November 30th is tin the period of the 11th through the 30th day after the invoice date so the amount to be remitted is the list price of $195.50
RATIOS, FORMULAS and CALCULATORS
These files are in the Microsoft Excel format and are avaialbe for download.