Where Is Your Profitability Hiding
Jul 19, 2010
I’ve been spending some time lately analyzing gross profit $’s and margin %’s. It’s interesting, because even if it’s trending in a relatively flat line, you may not be seeing the whole picture from 30,000 feet. Whether you see your gross margin increasing, decreasing, or holding steady, you may want to do a little research to determine if the results are truly what they should be. The issue is that there could be hidden risks or opportunities in there.
If you’re selling 4 products, for example, you may find that one of them has been getting more expensive to produce while another has gotten more cost efficient. And if you were to review them individually, you may opt to increase your pricing to your customers on the product that currently provides a lower individual return.
You may also find that you’re not selling as much of the more profitable product than you used to, because the pricing is no longer competitive. Maybe your competitors have been tracking the improvements in cost to produce and passing a portion of the savings on to their customers.
What if you need to reconsider your product mix, and your marketing spend on each product line in order to achieve desired returns on your marketing dollars? What if one of your vendors raised their unit prices without notifying you?
Without an understanding of the “numbers behind the numbers”, you’re operating your business in a bit of a dark room.
Taking the time to understand the financial statements supporting your business will equip you to make better decisions whether your goal is to grow your current company organically, or grow through acquisition. It will help you to determine the best time to invest in new equipment, hire staff, request a loan from your bank, or reach out to investors for additional working capital.