Mind your margins

They say it isn’t about how much you make but how much you keep.

That’s why every business dashboard I build starts with gross profit, not revenue.

Revenue is an important key performance indicator (KPI). But gross profit tells you so much more about how effectively a business runs.

But first, what is gross profit?

1. Start with gross revenue, or the total sales price for everything sold during the period (month, quarter, year).
2. Then, subtract any discounts and refunds. This gives net revenue.
3. From net revenue, subtract direct costs. These are the costs of fulfilling your commitments to your customers. Without paying these expenses, your company may continue operating, but you couldn’t produce and deliver any products or services.
4. Subtract direct costs from net revenue to calculate gross profit.

Gross profit tells you how much money you collect from customers stays in your business to pay for administration, advertising, overhead, and ultimately the owners.

You can go one step further and divide gross profit into gross revenue to get your gross profit margin (GPM). GPM lets you compare your company to benchmark data for your industry. This comparison helps set performance targets. It also helps in the valuation of your business if and when you look to sell.

If your margin is lower than your target or benchmark, you need to reduce your direct costs or increase your prices. (But you should be doing both of those things anyway 😉)

If your margin is higher than your target or benchmark, you should celebrate! But just for a moment. It’s possible your industry may catch up to your efficiency level and sell at lower prices.

Or your fulfillment staff may be underpaid and seek jobs elsewhere.

So relatively high margins, while not immediately a bad thing, could indicate something needs checking out in your financial data or operations.

Tracking gross profit over time allows you to monitor the performance of your operations. As a result, you can make informed decisions about optimizing pricing, sales, and fulfillment to increase profitability.

As I said, gross profit is where I always start a business dashboard, which is included in the Profit Partner Program.

We’ll review your profit margins and several other KPIs in our monthly or quarterly video calls.

And if you aren’t already categorizing your direct costs, the included quarterly review of your bookkeeping and accounting practices will help.

Think of it as having a CFO as a business partner without giving up equity.

Sound interesting? Click here to schedule a call, and I’ll give you all the details.

So let me know…

Do you track your direct costs separately from your other expenses?

Do you know your agency’s gross profit margin?

Are you confident about how your agency’s profitability compares to other agencies?

Hit REPLY and tell me about it!