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Better Business Decisions
What is my Gross Profit?
Hi there. Welcome to Better Business Insights. I'm Liz Jarvis. Today. We’re going to be talking about margins, gross profit margins. Your gross profit margin is the amount of money that's left after you've taken off the cost of whatever you've sold. And this is an area where lots of people have rules of thumb.
You know, your margins should be this. It should be that. You know, in the fashion industry, it should be this in the car industry, it should be that. But, it's really important that you, as the business owner, engage in the process of deciding what your margin is, and deciding how you measure those costs that create the product that you're selling.
How much overhead should you be including in that cost? What about freight? How much does that vary? There are many, many things to examine when you look at your margin and it is the margin that ultimately determines just how profitable you can be. We have overheads, of course, that sometimes are fixed, but the difference between what you can sell your product for and what it costs you is a very important calculation and it can be manipulated quite badly.
I've had over the years experience of a number of different players manipulating a number of different things. So for example, your salesman might be throwing in free product or free time or discounts, and they might be doing this to close the deal.
But in doing that, they're pushing down the overall margin of the business and they might be doing it without you knowing, depending on how well your systems are set up to capture that information. Another thing that could happen is that whoever is involved in determining what's fixed and what's variable in a business hasn't taken into consideration all of the things that are important.
Now, the Business Owner really does need to get involved in these decisions. It's not the Accountant’s job, it can't be abdicated to somebody else. You've got to have a good idea of what goes on and what profitability that generates for your company. It's from getting that nuts and bolts understanding and working in collaboration with professionals that you can find the tweaks that are necessary to just get that extra inch of profit, [to understand, where it's worth moving into a market or not moving into a market, whether you've got enough margin to make that tender worthwhile and so on and so forth.
So, margin is a big topic. But it's one of the most important reasons that Business Owners should start to connect with their numbers. And that of course is why we're here at Better Business Decisions, because we want to empower business owners everywhere to actually enjoy their numbers. And what's more enjoyable than setting your gross profits at levels that make your business profitable.
Have a great day. See you next time.
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