Gross profit is a key indicator of your business’s overall health, so keep reading!
Measuring and monitoring your gross profit regularly will tell you a LOT about what’s happening in your business and how you can make more money.
So firstly, what is gross profit?
Gross Profit =
Cost of Goods Sold
It’s usually represented as a % of sales.
Generally, the higher the gross profit % the better.
Gross profit can be measured for your business overall and it can also be used on a more detailed level for eg. per product line, type of customer, location etc.
Why is gross profit so important?
Gross profit is the amount of money left over from sales to cover your overhead expenses (electricity, rent, insurance etc). In most cases your overheads are relatively fixed and there’s not a lot that you can do about them. Not the same for gross profit!
Measuring and monitoring gross profit and investigating significant fluctuations allows you to know exactly where, how and why changes need to be made so that you can make more money from each sale.
It’s imperative to understand what your most profitable and least profitable product/service lines are. You may use the information decide to stop offering unprofitable lines and/or decide to “push” your more profitable lines in your marketing for example.
What should you be looking for?
Gross profit should remain fairly stable over time. If it fluctuates significantly downwards it’s an indicator to further investigate for things such as possible fraud, accounting irregularities, mismanagement or perhaps increased competition. If any of these are the case, it’s obviously best to sort them out ASAP.
If your gross profit fluctuates in a positive way, it could indicate an improved product mix shift, better buying decisions or improved efficiencies. It’s good to know these things so that you can keep doing them!
So it makes a lot of sense to keep your eyes firmly on your gross profit right?
- Determine your overall business gross profit and monitor it regularly (eg monthly)
- Determine the gross profit of your individual product /service lines (and even by location, customer type, business divisions if possible) and monitor regularly.
- Make an effort not to discount or compete on price. Instead, look for ways to differentiate your offering on another basis eg. turnaround time, availability of support, ease to buy etc
- Review your supplier’s invoices regularly to ensure quantities and prices are correct and are reflected in your sales model (know in advance when supplier prices have been pushed up so that you can consider raising your sales price)
- Have strong systems in place for stock/materials. If stock goes missing for example or you have a lot of wastage it will affect your gross profit. If reporting is incorrect it will also impact your gross profit. If stock is obsolete or slow to move, then consider dumping it.
- Measure and monitor!!!