[Question] GP% for Manufacturing concern

[mother]

My experience is actually in the retail sector. And somehow, by accident, I started a manufacturing business just over 2 years ago, which proved to be very successful and has enormous potential. We are banging our heads against that "small business ceiling" at the moment, and I am investing a lot of time now in a proper business plan, to help us break through this ceiling.

One of the key strategies I am just not sure of, is how high I should plan our future GP%. Where we are now, is far too low, and for all the right reasons: entering the market, insufficient supplier base, manufacturing small quantities, etc. All of these reasons will be phased out, as we purchase more machinery to reduce manual labour, streamline production lines to reduce the stop-start waste, etc etc.

I would just like some guidelines as to what is an acceptable healthy average GP% to aim at. I know the answer for retail, but not for manufacturing. And does it also vary according to the type of product/brand/organisation, as it does in retail?

[Neville Bailey]

I haven't been in manufacturing from some time but, when I seem to recall GP% figures of about 50%.

A lot also depends on how you cost your finished goods.

Some companies only bring in the cost of raw materials into their finished goods, resulting in a bigger GP% being reported, whereas other companies absorb all direct costs, and a portion of overheads, into their finished goods, resulting in a smaller GP% being reported.

In my experience, we costed raw materials, plus direct variable labour and direct (production) overheads.

[mother]

Thanks Neville, that's very helpfull. I am costing in all direct costs: raw materials, direct labour, design & sampling. So if I'm aiming to get to 45% that should be healthy without being ridiculous then?

Obviously selling prices are pretty much fixed, since there is a market value perception which you cannot change, but the trick is going to be to restructure operations and costs to adjust that GP.

[BusFact]

We manufacture a range of products and the GP varies considerably across them. Where raw materials are available locally and its "high" volume products with many competitors, the GP is much lower than 50% (and thats using raw materials only). Then on the other side, the products which have imported raw materials (so you need to keep 6 months stock and pay in advance, etc), low volumes in niche markets with few competitors have much higher GP values.

This is almost always a factor of what the market will accept rather than what you want to charge.

[mother]

Thanks for the guidelines BusFact. It helps me a lot!

[wynn]

I would cost materials at what the 'Joe Soap' would pay retail from the local store, then mark up by 50% as the traffic can bear.

Any extra profit will come from you sourcing cheaper raw materials.

[AmithS]

As all have said above. I think between 45-50% if you are calculating GP with all the important factors taken into account.

Use average "Joe Soap" material prices - any savings is yours.

Your GP should be an average across the board GP that you are looking for as you may have a few products i.e. Product A at 40% GP and Product B at 55% GP kinda thing.

Also what would be really good is depending on the market you are in if you could get a feel for what your competitors are doing as
1. You dont want to shoot yourself in the foot by out pricing yourself.
2. Also you dont want to lose out on profit that others are cashing in on - but also this could be used as a competitive advantage\strategy to grow your business volumes in the short term, however always have a plan of how you are going to manage this as customers dont always take lightly to large price increases even if you are cheaper than others - rather consider a "lock in strategy" for the long run

Just my 2cents worth

[AmithS]

Also, try your best even thou it is difficult at times to continuously monitor your GP at least once a month to see how your plans are going... (over time with experience you might not have to do it as often)

It is always important to ensure that you make use of your plans and refer back to them continuously. Setup a schedule to review your plans and try to keep maybe a brief 1 page summary of the important key measures i.e. GP that you need to monitor to see how your plans are panning out...

[Blurock]

There is no hard and fast rule as to what your GP should be. Entrepreneurship means that you are making the investment and taking the risk and therefore any benefit is due to you. (Not so in Corporate and state owned entities as I see them as managers and employees only and the entitlement of CEO's and managers in those sectors is criminal).

GP depends on the nature of your business, the industry you are in and whether you are a low cost, high volume producer or a niche market player etc. The objective should be to create wealth by reinvesting in the business and its stakeholders. GP should therefore be sufficient to cover costs as well as growth, while also being competitive in your market.

There is nothing wrong if you could achieve high GP's, but the bells should start ringing if you have no surplus in your nett profit to invest in additional stock, equipment or cash flow to fund your growth. (Business die if they don't grow)

[mother]

Thanks Blurock. Your advice is much appreciated.