Once your core business plan has identified the most likely base sales figures, be sure you have in place the management reporting tools that will keep you informed as to how that plan unfolds over the coming year. One of those tools is gross profit management. Managing gross profit margin is important because all of your manufacturing and sales costs have been accounted for before you get to the gross profit line on the profit and loss statement. Set margin percentages for all your key products including spare parts with a periodic reporting system in place. Very competitive products with low margins should be offset with high margins for key new products. The total margin must be high enough to cover your General and Administrative (G&A) operating costs. These are the activities that you can manage, which can impact your final operating results.

G&A usually includes engineering, R&D and marketing budgets that can be leveraged to obtain maximum results.

One key activity to manage is new product development. When any new product was first proposed, there should have been a target selling price based on the market research that was fundamental to the original launch. Watch the projected manufacturing cost estimates as the R&D progresses. Any new product introduced must have a higher margin after costs than any existing products. Otherwise, why bother? Total manufacturing and distribution costs are now being wedged between the target sales price and the new higher margin requirement.

My experience is that the manufacturing cost estimates will increase as the development program discovers new problems that must be overcome with design changes. You will now be forced to define whether the margin or the selling price will yield to these costs. Most likely the margin will be the victim. This will be a bad compromise for your future profitability should this product succeed. It is very difficult to raise the selling price of a new product after it has been successfully launched, so you may be saddled with that low margin longer than you want. Attack those manufacturing cost estimates early to avoid that compromise.