Posts Tagged ‘profitability’

Are You Measuring the Right Things?

In business there seems to be an unlimited number of things to measure. But the question is, are you measuring the right things? Read the rest of this entry »

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Consider a Variety of Business Information

Do you consider a variety of business information when making decisions, or are you stuck in the habit of only looking at a few things you think are important? Read the rest of this entry »

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Remember What Your Business Is

Do you ever get so caught up in details that you essentially fail to remember what your business is? Of course this question is a little tongue-in-cheek as I doubt anyone truly forgets what they are selling. Rather this has to do with how we all can get so distracted by the nitty-gritty details of running a business that we Read the rest of this entry »

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Turn Losses into Profits

What do you do when your company begins to lose money? The answer or answers will determine if you profit in the future or continue to lose. Actually, the title of this article is a little misleading since a loss remains a loss. But the actions prompted by Read the rest of this entry »

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Understanding Gross Profit

Gross profit is defined as Sales – COGS with COGS standing for Cost of Goods Sold. The formula is simple enough, but really understanding gross profit involves more than just knowing how to calculate it.

Gross Profit Margin

This calculation for gross profit margin is (Sales – COGS) / Sales and is expressed as a percentage. This formula, like the one for gross profit, is very straight forward. However, the gross profit margin does tell us some things that the gross profit itself does not. Let’s look at an example. In the example we will look at two different months for the same manufacturing company. We will also assume that the company has no ending inventory at month end for both months.

gross profit calculation

Some Analysis

When you look at this example, at first nothing seems to be all that significant. Sales in month 2 were less so you naturally expect your gross profit to be less. But look at the gross profit margin. For the first month it is 40% but in month two it drops to 33%., a decrease of 7%. That is significant. Now see the analysis of cost of goods sold. As you can see the variable cost as a percentage of sales is the same for each month but less in dollar amount for month two. However, the fixed cost remains the same in dollars but jumps 7% as a percentage of sales. Since there was no ending inventory, all of the fixed costs of manufacturing had to be absorbed both months.

This analysis demonstrates the significance of the amount of sales on the gross profit and the gross profit margin percentage. A key to understanding gross margin is to understand that the level of sales and your ability to control fixed costs can have a dramatic impact on your profitability. We are starting to get into break-even analysis here, but I will leave details of that for another article.

Do you understand gross profit and gross profit margin? Understanding this is critical to making sense of you income statement. Even more important is know what you can do to help improve both of these key measures.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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Some Key Financial Indicators

If you are attempting to manage a business you must have timely and meaningful financial indicators. Many companies do this with some sort of financial dashboard, but whatever your method, here are a few things to be on top of.

Some Balance Sheet Data

Keep up with some key balance sheet data. This should be done at a minimum monthly, but preferably weekly or even daily, depending on the particular piece of information. Here are some of the key financial indicators to track: Read the rest of this entry »

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The Danger of Seasonality

Having just recently ended the Christmas season and the madness this creates in retail serves as a reminder of how difficult it is to be profitable. This difficulty is even greater when a business has high seasonality. Read the rest of this entry »

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