No surprise – smart business folks focus on the bottom line. Great idea. But, what does that mean?
Businesses that have made it through the last few years quickly figured out how to cut expenses and get lean and mean. Survival.
Now, smart businesses are focusing in on Gross Profit.
Gross profit is the value of sales less the total cost of the product or service sold. It is a critical measure in any business. An increasing gross profit is the result of good decision making about the price and cost of products or services.
Gross profit margin must be sufficient to cover all operating expenses such as selling, marketing, distribution, warehousing, and overhead costs. Gross profit is the starting point to allow the business to realize their desired amount of net income or return.
Gross profit margin percentages can vary widely depending on the industry. In certain industries 30% gross profit margin can be attractive. In other industries, margins 50% or above are reasonable. No matter the industry, it’s important to know the industry average and seek to be at or above it. If the business has below industry average margin then something is out of balance. Our firm has access to data that allows me to provide that intel to business owners.
The obvious place to start is to increase prices and/or reduce product or service costs. Less obvious are managing the mix of products or services, perhaps taking advantage of early pay discount, negotiating volume discounts, asking for volume rebates, and introducing profitable new products or services.
Many times uncovering opportunities to increase gross profit margin requires more in depth data analysis. For example, a breakeven analysis by product or service line is important. Drilling down like that may uncover a product or service that is costing money at the gross profit line and that is bad. Actually, really bad, unless you love loss leaders.
A healthy gross profit enables company leaders to focus on growing the business.