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Know Your Gross Margins To Achieve Financial Success In Your Business
By | January 7, 2009
One of the most invaluable ways a business owner can ensure the success of his company is to learn how to figure and track gross margin. Big companies and large corporations alike know exactly where every dime is spent and every dollar that is gained through purchases because they know how to utilize this tool. By tracking revenues, expenditures and market trends, they know how and when to make adjustments to maximize profit margins. When implemented correctly, all of the guesswork is taken out of pricing products and services, you have a better idea of when to set sales and promotions and you can determine what areas of your business need improvement.
Before your head starts spinning at the thought of some complicated math formula, understand that the process is not that difficult once you comprehend it and… learning how to chart your numbers will provide you with the means to adjust pricing, track revenues and costs as well as the ability to spot trends in business flow. Knowing and tracking gross margin is one proof positive way a business owner can determine how well his business is performing financially.
Simply put, gross margin is the direct percentage of the selling price that is profit. While some prefer and most small business owners know the formulas to figure the mark up of products and services to arrive at a profitable selling price, many find the method of figuring gross margin easier as these numbers tell exactly how much of your selling price is profit.
Gross profit dollars are the funds made that pay the overhead and keep a company in business. Knowing your gross margin allows you the benefit of being able to look back over past months to see how your business was doing financially and make comparisons with previous months enabling you to recognize trends in customer flow and traffic.
Another benefit of this practice allows you to see where you may need to make adjustments. Let’s say you own a mom and pop restaurant serving home cooked meals. To compete with franchise operations, you adjust your pricing competitively but are not realizing the profits necessary to maintain your business even though the restaurant stays busy, has a marvelous reputation, and you use all of the finest ingredients.
By knowing your gross margin, you would see that your cost is too high to compete with other restaurants who receive discount, franchise pricing for their consumables, advertising, etc. From this vantage point, it would be clear that you should adjust your pricing to accommodate the cost rather than skimp on the quality items that have made your business successful. Then it would be feasible to advertise that your menu items are made from the finest ingredients and that no cost is spared to deliver quality meals.
If you do not already have this information at hand, go back over the past 18 months and track your revenue and cost. From here, you will readily see whether it is your cost or your pricing that is affecting your business. You also can see what your business was doing at the same time last year to determine where problems may be. Perhaps revenue is down due to decreased customer spending or your costs have increased. Once you can see the numbers clearly, it will be easier to get your gross margins in line, budget for future progress and achieve the success you have worked so hard for.
Topics: Recession |
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