Q As we are focusing on improving our gross margin, we are looking at one of our business lines that are products we purchase from vendors and resell to our customers. These are relatively low-price, high-volume items compared with others we sell. What actions can we take to improve profitability on these products?
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A As the current banking crisis and the accompanying credit crunch continue to unfold, companies must work more diligently to improve margins. Generally speaking, firms in industries such as software typically have higher gross margins than firms in manufacturing. If a company does not manufacture the product but purchases it from vendors to resell, then it has fewer metrics to work with to improve the gross margin for the product line.
Because there is no production, other areas to improve upon could include product pricing and inventory control. You can also try to avoid excessive buildup of inventory and shorten the time between purchase and sale; this helps lower the cost of carry physically and financially.
Adjusting pricing by negotiating a better procurement price from vendors and increasing the volume sold at a marginally higher price can increase profit margins.
These are not the only ways to increase profitability. A company could also upgrade the receivable collection period from customers, offer creative trade credit to the customers that is tightly synchronized with the payables to the vendor or set up a lockbox or an electronic collection system to speed up customer payments.
ASSOCIATE PROFESSOR OF FINANCE
UNIVERSITY OF ST. THOMAS OPUS COLLEGE OF BUSINESS