Gross Margin
Posted On: 18/01/22 - 0

Gross Margin

Why Is It Important To Understand Gross Margin In Your Business?

If you’re not monitoring your gross margin on a regular basis, you could be losing a lot of profit within the business.  If you see an accountant only once a year (at the end of your year), the problem will not be discovered until it’s too late to recover those losses.  Many business owners wait for a few years before they have their corporate returns processed. That can add up to a lot of lost revenue. Lost revenue most businesses cannot afford to lose.

What is Gross Margin?

I will use an example of a retail store. More specifically, a clothing store, let’s assume you’ve been in business for a number of years. You are so busy working in the business that you haven’t made time to monitor your gross margin. I define gross margin this way, it is your gross profit which is your revenue less the expense to deliver your products or service, so that would be the clothing in this example and the profit associated. Your revenue less the cost of the clothing will be your gross margin.

Why Do Businesses Lose Profit Without Realizing It Immediately?

Often, the loss of revenue is discovered after the fact. One reason could be because of price increases from your suppliers, or, it could be because of exchange rates, it could also be because of debt.  There are a myriad of reasons that would cause your margins to drop. If you’re monitoring it after the fact it’s too late to correct it. If you’re waiting until the end of the year and you’ve found you had a 10% drop in margin, then it’s a serious mistake, and a lost source of revenue.

Have A System In Place To Monitor Margins Regularly

For business owners it’s crucial that they have a system in place to be able to determine if they’re maintaining their margins on a regular basis. The suggested regular basis is at least monthly. Conduct a regular review so that you know that you are not losing margin and you’re able to intervene to be able to correct that issue in a timely manner. If you are too busy, then perhaps it’s time to hire an accountant who offers monthly services.

Make This A Priority

Often, business owners come in with a few years to do at the same time.  Many times when I get these types of books, business clients weren’t paying attention to their gross margin and at the end of the year, or after a few years, they finally get their statements and realize they lost a huge source of revenue money.  This could have a dire consequence to your business.

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