Generally speaking, the higher your gross profit margin is, the more efficient your business is at creating revenue from a certain amount of inventory - it is a direct reflection of how well-designed your processes and procedures are 5. Different acceptable gross profit margins may differ from industry to industry and business to business. However, you may find that your own gross profit margin is falling short of what you would expect.
If this is the case, there are two main methods of improving it: Increase your prices, or reduce your costs 2. Increasing your prices can be a dangerous gambit, as it may push customers away from products due to a higher price point. You may decide that this is not significant enough, and decide to increase your prices.
If successful, you would end up improving your gross profit margin to 50 percent; a significant improvement. This is a simple example, but improving your gross profit margin may be a case of finding the right balance of prices 2. Depending on what your costs actually consist of, reducing your costs can include a number of different strategies. This is why it is important to look at both sides of the equation; a change at one end may be more significant than a similar change in the other.
Gross profit and gross profit margins can be an important evaluation technique for your business, and sometimes improving it can involve additional investment in capital than you have easy access to. We offer a full range of competitive banking, including home and personal lending, savings and transaction accounts, term deposits, business banking, and can arrange financial planning, insurance and travel products.
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What are you looking for? Gross profit and your business: What does it mean? Here's what you may need to know to interpret them properly. It is a key measure of profitability for a business. Gross margin is the difference between revenue and costs of goods sold , which equals gross profit, divided by revenue. Therefore, declines in margin generally occur because of shrinking revenue relative to sales volume or higher COGS.
If your revenue declines because of lower sales volume, it doesn't necessarily affect your gross margin. However, if declining revenue results from lower price points on sales , gross margin typically declines. A number of factors cause a business to lower prices and, subsequently, to experience reduced gross margin. They include:. Gross profit is simply equal to revenue minus COGS. While gross profit is the amount of money as an absolute value that remains after COGS is subtracted, gross profit margin is gross profit as a percent of revenue.
Since gross profit is an absolute number, it is somewhat less useful as a comparison tool for investors than gross profit margin, which is a percent. Investors can more easily use the gross profit margin metric to analyze and compare companies. However, you can better understand a company's gross profit by closely examining its COGS. Product businesses usually have higher COGS than service businesses, meaning that product businesses generally have lower gross profits.
But service business usually have higher operating expenses than product businesses, so higher gross profits are necessary for service businesses to pay for fixed costs such as insurance or marketing. If two similar companies with similar revenues have much different gross profits, then the company with the higher gross profit likely has some significant competitive advantage.
If a company's revenue over time stays constant but its gross profit sharply declines, then one or more of its direct costs has significantly increased.
Sometimes a company's COGS stays constant but its gross profit drops because the price the company is able to charge for its product or service has substantially declined. Over time, maintaining a strong brand image allows you to maintain stable price points, or even increase prices.
If you constantly discount, you run the risk that customers get comfortable with the lower price and won't pay top rates. In an industry with many competitors forcing prices down, reducing the cost of good sold through the acquisition of cheaper supplies or cutting labor costs may be necessary. Along with higher supplier pricing, ancillary costs contribute to higher COGS. If your business moves to more environmentally friendly packaging, for instance, you can either pass the costs on to customers or take a hit on gross profit margin.
Distribution or transportation costs can also increase your COGS. Again, figuring out ways to minimize gains in these product-related areas or passing on the costs to customers are possible protective measures.
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