Understanding Gross Profit MarginPosted on July 24th, 2018
The main goal of most small businesses is to produce goods or services to make a profit. Several financial ratios can help evaluate how your business is performing financially. One of the most important indicators of the health of a business is the gross profit margin. It indicates how much money is available to expand and increase sales. Any small business that intends to grow needs to show a high gross profit margin.
What Exactly is a Gross Profit Margin?
Gross profit is the amount of money left after you subtract the cost of producing whatever you are selling from your total sales. Gross profit margin is the gross profit expressed as a percent of total sales. It is calculated by adding the total sales for the fiscal year and subtracting the cost of labor, materials, and production overhead. Divide this result by the total sales figure and multiply it by 100.
Reduce the Cost of Materials and Labor
To properly analyze your gross profit margin, it’s important to look at your cost of production. The two most important expenditures will be the cost of materials and labor. If you can reduce these costs, you will raise your gross profit margin. To reduce the cost of materials, look for the best price possible, change suppliers as needed, and look for cost-effective materials. Train your employees efficiently and invest in more efficient equipment.
Consider Increasing Sales or Prices
If you can increase prices while still maintaining sales, your gross profit margin will rise. By the same token, if you can increase sales without increasing prices, you stand to save on costs because you will be producing higher volumes. Production overhead will not increase as quickly as your volume of production rises.
Should I Hire a Chief Financial Officer?
Want to see your gross profit margin increase? Consider hiring a Chief Financial Officer (CFO). A CFO can help your company grow smarter and faster. Many business owners and managers don’t consider hiring a CFO because they fear it will be too expensive. What they don’t realize is that they are already spending that money in lost profits and a stagnant gross profit margin.
A CFO will look at your business with an educated financial point of view, and take charge of the financial future of your company. A high gross profit margin will give your company the flexibility to be creative and innovative to grow. One of the smartest decisions you can make to increase your gross profit margin is to hire a CFO. At Davis & Associates CPA’s, we work with entrepreneurs in Bonita Springs, Naples, and Cape Coral to help them grow their capital so their business can thrive. We provide CFO services along with full-service accounting. Give us a call today to set up a consultation.