Tuesday, December 17, 2013

5 Gross Margin metrics and how they matter

Profit and loss is reported in every business through the income statement.  It is here that profit metrics can be created which can help a company assess its health over time.  Bimotics makes this analysis easy.  Especially in the case small and medium sized businesses, gross profit and operating profit analysis can help determine whether a company is executing on their core activities and what their next steps should be.

For example, gross profit is used to understand gross margin. Over time, if gross margin decreases, that implies that production costs are rising faster than sales. This trend signals that the company will need to increase cost controls and/or look for options to improve sales. When working with companies, we  have seen it time and again -- investors get concerned when profit margins are too low, indicating key weakness in the business model.

There are different ways to learn from the gross margin metric and leverage the power of Bimotics.  Following are a few examples:
  1. Gross margin by product/service line: This lets you see which products or services bring you the greatest profit per unit. This analysis helps you identify the level of impact your products have on the bottom line.  You can use this information to help you decide, for example, if a product line is worth developing or phasing out or what campaigns are needed to improve a product line’s performance.  
  1. Overall gross margin over time: This lets you see how sales and costs impact a product over a period of time. Trends can be measured and predicted taking into account external factors such as inventory headwinds and internal factors such as cost of inventory storage. Controlling or counteracting these factors can keep margins at a healthy level.

  1. Gross margin by team: This lets you see how different working teams within your organization manage sales and costs. Depending on the objective of each team, you can compare and learn how they managed resources to meet particular goals.  This metric is used for learning events.

  1. Gross margin by customer type: This lets you see which kinds of customers are impacting your profit and suggest price points that each type of customer will be willing to pay. Use the metric to decide if and how a particular product should be introduced and marketed to a certain customer segment.
  1. Gross margin planned vs. actual: This is a good benchmarking tool that helps you analyze how well actual business measured up to what was forecasted.  The difference between the two gives you a starting point on where to delve deeper into the factors that are really impacting your business.  What did you not take into consideration that you were supposed to?  Are you meeting your goals?

In summary, gross margin is a key profit metric that every business needs to understand and track because it illustrates the relationship of sales and costs and is impacted by many facets of your business ranging from team and operations, to customer and product.

Bimotics allows you to easily and meaningfully analyze gross margin, and help you to fine tune and grow your business

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